Eurozone inflation unexpectedly edges up to 2.6% in July

Inflation unexpectedly heated up in the eurozone this month, complicating the European Central Bank’s (ECB) next decision on whether to cut interest rates for a second time this year.

Price growth in the 20 countries that share the euro accelerated to 2.6% in July, statistics agency Eurostat said, which was higher than the 2.5% recorded in June.

Core inflation, which strips out volatile food and energy prices, held at 2.9% for the third straight month.

The widely watched services inflation print came fell to 4% in July, down from 4.1% in June.

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Investors previously expected the ECB, which was the first major central bank to cut rates from record post-pandemic, to lower borrowing costs for a second time at its next meeting in September.

However, increasing inflationary pressures could undermine the rationale for further rate cuts by the ECB.

Franziska Palmas, senior Europe economist at Capital Economics, said: “The small fall in services inflation in July is probably just enough for a September rate cut to remain the base case. But with underlying price pressures still high, the decision will be a close call and will depend on data to be released over the next few weeks, including the August inflation print.

“While the fall in services inflation means a rate cut in September is still more likely than not, it is not a done deal. And until services inflation falls more significantly the ECB is likely to continue to ease policy only slowly.”

The rise in inflation comes after the European Central Bank cut interest rates for the first time in five years in June.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said the figures were “not much to worry about, but will keep the ECB on the cautious side”.

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The ECB governing council said it would continue to consider the dynamics and outlook of inflation, as well as the strength of monetary policy transmission in its decision-making. It stressed that was “not pre-committing to a particular rate path”.

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