Core surprise shows eurozone inflation stickiness
Eurozone inflation rose from 2.8% to 2.9% YoY in July, matching consensus, while prices increased by 0.2% MoM.
The headline was therefore unsurprising. The underlying figures were not: core inflation accelerated to 2.5%, against expectations for an unchanged 2.4%, while services inflation rose from 3.2% to 3.3%.
This makes the release more hawkish than the headline suggests and strengthens the case for another ECB rate hike in September.
Higher energy costs explain much of the headline rebound, reversing the temporary relief seen in June. But the increase in core and services inflation suggests that stickiness is beginning to show elsewhere. That is consistent with the German data, where the expiry of the fuel-tax rebate lifted headline inflation sharply, while goods, transport and healthcare prices also strengthened. The evidence of broader pass-through remains tentative, but July’s eurozone figures provide the first indication that renewed energy pressure may not remain confined to fuel.
Admittedly, this is not yet a repeat of the broad inflation shock seen in 2022. Demand remains soft, wage growth is cooling, and companies face greater resistance when passing higher costs on to consumers. A single core upside surprise is therefore insufficient to conclude that inflation has become entrenched. Even so, the ECB will be more concerned about the direction of travel: headline inflation has risen, core inflation surprised to the upside, and services price growth remains well above target.
For the euro, the core surprise matters more than the expected headline increase.
The ECB’s July hold reflected a desire for more evidence, not confidence that inflation was under control. Today’s data provide some of that evidence and validate the Bank’s recent shift towards a more hawkish assessment of inflation risks. July’s release confirms our base case for an ECB rate hike in September and should keep the single currency supported.