Eurozone inflation edges up in ‘difficult print’ for ECB

Price growth in the 20 countries that share the euro accelerated to 2.6 per cent in July from 2.5 per cent in June according to Eurostat’s flash estimate. PHOTO: REUTERS

Published Wed, Jul 31, 2024 · 05:16 PM

EUROZONE inflation unexpectedly edged up in July, data showed on Wednesday (Jul 31), although a widely watched gauge of price growth in the services sector eased.

Wednesday’s figures did not seem to derail market expectations for an interest rate cut by the European Central Bank in September, but they were likely to strengthen concerns about a difficult last mile in the ECB’s efforts to bring down inflation.

Price growth in the 20 countries that share the euro accelerated to 2.6 per cent in July from 2.5 per cent in June according to Eurostat’s flash estimate.

A key measure of underlying growth in prices – which excludes energy, food, alcohol and tobacco – failed to show the expected decline and came in unchanged at 2.9 per cent.

“It’s a difficult print for the ECB,” said Fabio Balboni, an economist at HSBC. “Disinflation on the goods side is coming to an end and services inflation remains high.”

Still, Balboni stuck to his call for ECB cuts in September and December, as did investors in eurozone money markets, on expectations that inflation would eventually ease.

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“I still expect a second rate cut to come in September,” said Kyle Chapman, a foreign exchange markets analyst at Ballinger Group. “I don’t think it matters too much if we get the odd data point that’s slightly stronger than expected.”

Eurozone inflation has fallen a long way since briefly hitting double digits in late 2022, when it had been boosted in large part by a brisker-than-expected reopening of the economy after the Covid-19 pandemic and more expensive fuel in the wake of Russia’s invasion of Ukraine.

But that progress has stalled in recent months as prices in the services sector got a boost from higher salaries.

Eurozone growth beats forecasts despite surprise German drop

HCOB’s preliminary composite Purchasing Managers’ Index, compiled by S&P Global, dropped to 50.1 this month from June’s 50.9, barely above the 50 mark that separates growth from contraction.

Eurozone business growth stalls in July, PMIs show

Inflation this year could average 2.4 per cent, in line with the survey’s prediction three months ago and could then slow to 2 per cent next year, as predicted earlier, both below the ECB’s own in-house projections.

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ECB said that higher interest rates and lower fixed investment continued to exert dampening pressure on loan demand from firms.

Eurozone consumer loan demand rises for first time since 2022

The household saving rate, which measures savings as a proportion of disposable income, rose to 15.3 per cent in the euro area during the first quarter, up from 14.1 per cent in the fourth quarter of 2023.

Eurozone household savings highest since 2021, but investments fall

This outlook gives the ECB room to cut its 3.75 per cent deposit rate to 2.5 per cent, or a “neutral stance” by the third quarter of 2025, IMF said.

Fresh inflation fall gives ECB room to cut rates: IMF

In a small, positive sign for the ECB, services’ price growth eased to 4 per cent from 4.1 per cent in June.

The ECB has made clear it would not be swayed by individual data points and will focus instead on the broader trend for inflation, which it expects to bounce around current levels this year before pulling back towards its 2 per cent target in 2025.

The central bank started cutting rates last month, paused in July and is widely expected to slowly dial back over the next one-1/2 years some of the steepest hikes it has made in its 25-year history. REUTERS

Eurozone Inflation

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