Key Takeaways
- Core inflation was stable at 2.3% in July.
- Services inflation posted its lowest reading in around three years.
- The odds of another rate cut at the September ECB meeting are declining.
Consumer prices in the eurozone increased by 2% year over year in July, according to Eurostat’s flash estimate, in line with June’s reading and above expectations of a 1.9% rise.
Core inflation, which shows prices without volatile components such as energy and food costs, rose 2.3% year over year in July, also higher than expected.
According to Eurostat’s estimates, food, alcohol and tobacco saw the highest annual rise in July at 3.3% year over year, higher than June’s reading of 3.1%. Services increased by 3.1%, compared with 3.3% in June, while non-energy industrial goods were up 0.8%, versus 0.5% in June, and energy was at -2.5%, compared with -2.6% in the previous month.
“Energy inflation offset only in part the rather strong acceleration increase seen in food prices while core inflation remained stable at 2.3%,” says Nicola Nobile, chief Italy economist at Oxford Economics. She adds that services inflation still remains above the ECB target, but at 3.1% posted its lowest reading in around three years.
On a monthly basis, HICP headline inflation was stable and core inflation was at -0.2% in July.
A Mixed Picture of Eurozone Inflation
Spanish headline inflation was above consensus expectations at 2.7% in July, 0.4 percentage points higher than June’s reading, driven mostly by electricity prices and to a lesser extent, higher increases in fuel prices compared with last year. Core inflation surprised on the upside, too, at 2.3%. French and Italian headline inflation were stronger than expected.
The flash estimate of French headline HICP inflation in July was 0.94% year over year, higher than consensus forecasts.
“But this was close to our expectations, unchanged from the June print,” Goldman Sachs said in a note on July 31.
The bank’s analysts said that Italian flash HICP inflation came in slightly above expectations while core HICP inflation stayed broadly unchanged over the year.
On the other side, German headline HICP inflation increased by 1.8% in July, slightly below consensus expectations of 1.9%. Core inflation was stable at 2.7%, the same level as June.
Is Europe’s Economy Growing?
The eurozone economy grew by 1.4% year over year in the second quarter, according to Eurostat, after rising 1.5% in the previous quarter. On a quarterly basis, GDP grew by a meagre 0.1%, down from 0.6% in the first quarter.
Among eurozone countries, Italy and Germany both saw a 0.1% contraction on a quarterly basis, while Spain recorded the highest increase at 0.7%, and France was up 0.3%. The year over year growth rate was positive for all countries.
It was “not a blow-out performance”, says Morningstar chief European markets strategist Michael Field.
“But growth in Europe has at least been positive and stable for some time now. In fact, Europe hasn’t seen a single quarter of negative growth in almost three years.”
Field adds that the trade agreement with the US could weaken GDP growth in the coming quarters, but “the risk of a recession is much lowered” relative to investors’ fears in April when tariffs were first announced.
Riccardo Marcelli Fabiani, senior economist at Oxford Economics, says that exports “face potent headwinds” amid tariffs and a stronger euro but “improvements in sentiment should limit the blow to investment”. Moreover, consumer spending should benefit from receding inflation and a resilient labor market, he says.
Will The ECB Cut Interest Rates in September?
The European Central Bank’s next monetary policy meeting will take place in Frankfurt on Sept. 11, and markets expect one more cut this year, but the chances of it happening in September are diminishing. The ECB kept interest rates unchanged at its monetary policy meeting on July 24.
“The ECB might take comfort from inflation having remained at target for the second consecutive month in July and above our forecast. This has reduced the odds of another rate cut at the September ECB meeting, which is currently our baseline,” says Nobile of Oxford Economics.
