Eurozone inflation ticks up in July, but ECB likely to remain on policy easing path

Euro zone inflation unexpectedly rose in July, ticking up to 2.6% from 2.5% in June and beating forecast for unchanged rate.

So called core CPI, ECB’s key measure of underlying growth in prices and excludes the most volatile components, such as energy, food, alcohol and tobacco, was unchanged at 2.9% in July, missing forecast for decline to 2.8%.

However, the data released on Wednesday, may not be sufficient to derail the European Central Bank from its path for a widely expected interest rate cut in September, but they were likely to boost concerns about a difficult task for the central bank in their efforts to bring inflation back to 2% target.

Inflation in the Euro bloc has fallen a long way since briefly hitting double digits in late 2022, when it had been boosted in large part by reopening of the economy after the Covid pandemic and significantly higher fuel prices in reaction to war in Ukraine and reverse impact of large set of economic sanctions imposed on Russia.

Inflation’s downward trajectory has been interrupted by rise in salaries which boosted prices, particularly in services sector in recent months, though one positive signal for the central bank was easing of services prices to 4.0% in July from 4.1% previous month.

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

The central bank has been widely expected to cut interest rates in September and again in December, to reverse part of the steepest rate hikes cycle in its history.