FX.co ★ Unexpected Rise In Eurozone Inflation Casts Doubt Over ECB September Rate Cut

In July, inflation in the Euro area saw an unexpected rise, with the cost of services remaining notably high. This development has introduced uncertainty regarding the European Central Bank's (ECB) potential interest rate cut in September.

According to preliminary data from Eurostat, the harmonized index of consumer prices increased by 2.6 percent year-on-year in July, compared to a 2.5 percent rise in June. Market expectations had predicted the rate would remain steady at June's 2.5 percent.

Core inflation, which excludes volatile items like energy, food, alcohol, and tobacco, remained constant at 2.9 percent, contrary to forecasts predicting a slight dip to 2.8 percent.

On a monthly basis, consumer prices stayed unchanged in July. The data revealed that all components of the Harmonized Index of Consumer Prices (HICP) grew over the past year. Notably, services costs saw a 4.0 percent increase, which, although significant, was marginally lower than June's 4.1 percent rise. Food, alcohol, and tobacco prices followed with a 2.3 percent increase, and energy prices went up by 1.3 percent. Non-energy industrial goods prices experienced a modest 0.8 percent uptick.

Earlier in the month, the ECB maintained its key interest rates, following a reduction in the previous session—the first in five years—and suggested the possibility of a rate cut in September.

Franziska Palmas, an economist at Capital Economics, noted that the slight decline in services inflation in July makes a rate cut in September more probable, albeit not certain. She emphasized that substantial easing from the ECB would likely depend on a more significant drop in services inflation.

Peter Vanden Houte, an economist at ING, remarked that while the overall downward trend in inflation persists, today's figures present a challenging decision for the ECB regarding a September rate cut.

Among the Euro area's largest economies, both Germany and France saw harmonized inflation rise to 2.6 percent in July from 2.5 percent in June. Italy's inflation surged more notably to 1.7 percent from 0.9 percent. Conversely, Spain experienced a reduction in inflation, which softened to 2.9 percent from 3.6 percent.