Euro Zone Inflation Hits 2.9% in July, Supporting ECB Rate Hike Views
Euro Zone Inflation Data and Implications for ECB Policy
By Balazs Koranyi
Inflation Rises Amid Oil Price Surge
FRANKFURT, July 31 (Reuters) - Euro zone inflation ticked up in July, adding to an already strong case for another European Central Bank interest rate hike, especially as high oil prices foreshadow a further broadening of price pressures.
Inflation in the 21 nations sharing the euro currency picked up to 2.9% in July from 2.8% a month earlier, in line expectations for 2.9%, with an Iran war-induced oil price surge driving the increase, Eurostat data showed on Friday.
Core Inflation and Services Sector Trends
A more closely watched figure on underlying inflation, which filters out volatile food and energy prices, meanwhile accelerated to 2.5% from 2.4% as services inflation rose to 3.3%.
ECB Policy Outlook
Though crucial, the July figures are unlikely to be a dealbreaker for the ECB since policymakers will get another inflation print in August before their next rate meeting and oil prices have proven to be extremely volatile.
ECB Rate Hike Expectations
Still, the central bank has strongly signalled that a rate hike is coming, arguing that the economy is performing along its 'baseline' scenario, which itself was predicated on a rate hike on September 10.
Economic Growth and Rate Hike Impact
Economic growth figures have also eased concerns that a rate hike, aimed at stopping high energy prices from seeping into broader price and wage setting, would stymie economic growth.
The euro zone economy expanded by 0.4% in the second quarter, twice as fast as expected, defying gloomy forecasts that the war and high energy costs could push it close to a recession.
Market and Economist Perspectives
Financial Market Expectations
Finiancial markets are betting on more than two rate hikes with moves fully priced in by October and April.
Economist Views on Inflation and Wages
Economists are more cautious, however, and they see just one more move on the premise that high energy prices have yet to generate any second round price impacts which could then perpetuate high inflation.
In fact the labour market is relatively soft, suggesting that wage pressures will continue to ease.
External Factors Influencing Inflation
Imports and Food Inflation Trends
Imports from China also remain relatively cheap while food inflation has been slowing for some time, offsetting some of the energy price increase.
Indeed, food inflation slowed in July while the price growth of non-energy industrial goods, which in great part reflects imports from China, picked up to a still low 0.9%.
(Reporting by Balazs Koranyi; Editing by Susan Fenton)
