Euro Zone Inflation Rises Unexpectedly in July

Euro zone inflation unexpectedly rose in July, ticking up to 2.6% from 2.5% in June, surpassing forecasts that anticipated an unchanged rate. The core CPI, the ECB’s key measure of underlying price growth that excludes volatile components like energy, food, alcohol, and tobacco, remained steady at 2.9%, missing the forecast for a decline to 2.8%.

Despite the rise, the data released on Wednesday may not be sufficient to deter the European Central Bank from its widely expected interest rate cut in September. However, it could heighten concerns about the ECB’s challenging task of bringing inflation back to its 2% target.

Inflation in the Eurozone has significantly declined from its brief double-digit peak in late 2022, a period marked by the post-pandemic economic reopening and significantly higher fuel prices due to the Ukraine war and sanctions on Russia.

The downward trend in inflation has been disrupted by rising salaries, which have particularly driven up prices in the services sector in recent months. However, a positive signal for the ECB was the slight easing of services prices to 4.0% in July from 4.1% the previous month.

The ECB has emphasized it will not be swayed by individual data points but will instead focus on the broader inflation trend. It expects inflation to hover around current levels this year before gradually retreating towards the 2% target by 2025.

The central bank is widely expected to cut interest rates in September and again in December, partially reversing the steepest rate hike cycle in its history.