Eurozone inflation rose to 2.6% in July, beating expectations and casting doubt on the possibility of an ECB rate cut in September. Energy prices contributed significantly to the increase.
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Inflation in the euro zone rose again in July, raising some doubts about the feasibility of the European Central Bank cutting interest rates as quickly as economists expected.
The harmonized index of consumer prices in the euro area rose by 2.6% year-on-year in July, up slightly from 2.5% in the previous month, according to preliminary figures released by Eurostat on Tuesday. Notably, annual inflation in July exceeded expectations for a decline to 2.4%.
Energy costs were a major factor, with prices rising 1.3% month-on-month, a sharp increase from June’s 0.2% rise. Non-energy industrial products also grew faster at 0.8% compared to June’s 0.7%.
The annual rate in July was highest for services at 4.0% (4.1% in June), followed by food, alcohol, and tobacco at 2.3% (2.4% in June). Core inflation excluding food and energy was stable at 2.9% year-on-year in July, beating market expectations for a 2.8% decline.
Inflation rises in Germany, price pressures slow in Spain and Portugal
Among eurozone member states, Belgium continued to have the highest annual inflation rate in July at 5.6%, the highest level since January 2023. However, on a monthly basis Belgian inflation slowed by 0.6%, reversing June’s 0.5% rise. In Germany, harmonized consumer prices rose by 2.6% compared to July 2023, up slightly from 2.5% previously.
On a monthly basis, Germany’s inflation rate accelerated by 0.5% from June’s 0.2% rise. In the Netherlands, inflation rose further, from 3.5% to 3.6%, the highest level since July 2023.
In contrast, consumer prices in Spain and Portugal fell significantly. Spain’s annual harmonized inflation rate fell from 3.6% to 2.9%, and Portugal’s from 3.1% to 2.7%.
Both countries had the largest monthly declines, with Spain and Portugal seeing declines of 0.7% and 0.8%, respectively. France’s annual inflation rate increased slightly, rising from 2.5% to 2.6%.
Will the ECB cut rates in September?
July’s inflation report showed a setback in the euro zone’s efforts to defuse inflation, and the rise surprised economists who had expected further easing.
Markets currently predict a 90% chance that the European Central Bank will cut interest rates at its September 14th meeting.
But the latest inflation figures could prompt reconsiderations, especially among hawkish lawmakers in Frankfurt.
Earlier this month, the ECB reiterated in its monetary policy statement that it “does not commit in advance to any particular interest rate path.” President Christine Lagarde underlined this point at a press conference, saying that decisions will continue to rely on data and will be taken on a meeting-by-conference basis.
“While this number is higher than expected, it does not shake things up in terms of ECB interest rate expectations. I still expect a second rate cut in September. Fluctuations around current levels. “Inflation rates are exactly what the ECB bases its forecasts on, and there’s not much to learn from small fluctuations in headline numbers,” said Kyle Chapman, foreign exchange market analyst at Ballinger Group. I commented.
Market reaction: Euro firm, European stocks paring gains
Immediately after the release of inflation data in July, market reaction was slow. Ahead of today’s Federal Open Market Committee meeting, the euro remained stable against the US dollar at $1.0820-$1.0830. Federal Reserve Chairman Jerome Powell is scheduled to speak at 20:30 CET.
The euro fell 1.2% against the yen as the Bank of Japan raised interest rates and scaled back its bond-buying program.
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European government bond yields were little changed, with German federal bond yields at 2.33%.
Stocks slightly pared gains in the session. The Euro STOXX 50, which opened 1.2% higher on Wednesday, was up 0.8% by 11:30 a.m. ASML Holding topped the list, rising more than 5%, followed by Danone and Airbus, rising 3.8% and 3.6%, respectively. The main laggard was Banco Bilbao Vizcaya Argentaria, despite reporting better-than-expected profits and revenues last quarter.
Germany’s DAX rose 0.4% and France’s CAC40 index outperformed, rising 1.3%. Spain’s IBEX 35 fell 1.3% and Italy’s FTSE Mib rose 0.2%.
