Key Takeaways
- Energy prices drove eurozone inflation higher in July, with core inflation also rising from June.
- Futures markets price in a 0.25 percentage point ECB rate hike in September and another increase before the end of 2026.
- Inflation figures follow better-than-expected GDP data released on July 30.
Consumer prices in the eurozone increased by 2.9% year over year in July, according to Eurostat’s flash estimate, as energy inflation accelerated. This compares with June’s reading of 2.8%. Core inflation, which excludes volatile components such as energy and food, came in at 2.5% in July, up from 2.4% in June.
Both figures were above the FactSet consensus estimates, and inflation remains well above the European Central Bank’s medium-term inflation target of 2%.
According to Eurostat’s estimates, energy inflation rose by 10.0%, up from 8.5% in June. Brent crude oil remains about 16.5% more expensive than it was at the beginning of July as the Middle East conflict intensified in the course of the month.
Services rose to 3.3%, compared with June’s reading of 3.2%. Food, alcohol, and tobacco prices were up by 1.2%, down from 1.5% in June, and nonenergy industrial goods prices rose by 0.9%, also up from 0.7% in June.
“The main driver was energy prices, which increased by 10.0% following the expiration of Germany’s fuel tax rebate and amid a renewed escalation in the Middle East,” says Ulrike Kastens, senior economist at DWS. “Core inflation edged up again to 2.5%. This was likely due in part to package holidays and vacation-related price increases, which pushed service sector inflation from 3.2% to 3.3%.”
Will the ECB Raise Interest Rates in September?
Activity in futures markets already implies another quarter-point increase as the most likely outcome after the central bank left interest rates unchanged in July.
Economists are expecting at least two more interest rate increases this year, with a first 0.25 percentage point hike expected in September.
“Overall, we believe that inflationary pressure is being driven primarily by energy prices, while the indirect effects on other components of inflation have so far remained relatively limited. Given the volatility in energy markets, however, continued vigilance on the part of the ECB remains warranted. We therefore continue to expect an interest rate increase to 2.50% in September,” DWS’s Kastens says.
Latest European GDP figures also gave the ECB some breathing room, says Morningstar chief European markets strategist, Michael Field, adding that the region’s banks have so far not rushed to raise interest rates. The European economy grew by 1% year over year in the second quarter, well ahead of economists’ expectations of 0.5% growth.
A Mixed Inflation Picture Across the Eurozone
Inflation varied across the bloc, with annual rates ranging from 2.0% in Estonia to 5.6% in Lithuania.
Italy’s annual inflation came in at 2.9% in July, down from 3.0% in June. Germany’s inflation came in at 2.8%, up from 2.4%, France’s inflation climbed to 2.4% from 2.0%, and Spain’s year over year number came in at 3.8%, also up from 3.6% in June.
