Eurozone inflation rises to 2.6% in July, beating projections

TOULON — The European Union’s statistics agency reported on Wednesday that headline inflation in the euro zone unexpectedly rose to 2.6% in July, despite a slight slowdown in the services sector.

Inflation stood at 2.5% in June, down slightly from 2.6% in May. Economists polled by Reuters had expected July’s inflation rate to hit June’s 2.5%.

Core inflation, which excludes volatile items such as energy, food, alcohol and tobacco, hit 2.9% in July, slightly above the Reuters estimate of 2.8% and in line with June’s core inflation rate.

Services inflation, a closely watched indicator, fell to 4% in July from 4.1% in June.

Several major eurozone economies, including Germany and France, saw HICP inflation rise from 2.5% in June to 2.6% in July.

The inflation report follows the release of eurozone second-quarter GDP data, which showed growth of 0.3% for the three months to June, according to the European Union’s statistics office. That beat the 0.2% growth forecast by economists polled by Reuters, even as Germany, the eurozone’s largest economy, contracted 0.1%.

Investors are now weighing how this new data could impact future interest rate decisions by the European Central Bank (ECB). Earlier this month, the ECB chose to keep current rates after a cut in June, with the possibility of another reduction in September still on the table.

The ECB Governing Council stressed that it will continue to assess inflation trends, the economic outlook and the effectiveness of monetary policy transmission in its decisions, clarifying that this does not imply a commitment to a pre-established rate path.

Julien Lafargue, head of market strategy at Barclays Private Bank, said the latest inflation data was unlikely to significantly alter the outlook for interest rates.

“While higher-than-expected inflation may be seen as a challenge for the ECB, it does not necessarily change the broader narrative. Economic growth remains weak, as shown by second-quarter GDP data, which should support a continued downward trend in inflation,” Lafargue explained.

Lafargue suggested that the ECB could consider further interest rate cuts in September.