Euro zone inflation falls further in comforting sign for ECB

FRANKFURT  -Euro zone inflation fell further in July and most measures of underlying price growth also eased, in a largely comforting sign for the European Central Bank (ECB) as it considers ending its severe run of interest rate hikes.

Consumer prices grew by 5.3 percent this month versus 5.5 percent in June, extending a downtrend that started in the autumn. Excluding energy and unprocessed food, prices increased by 6.6 percent after a 6.8 percent rise a month earlier.

While this is still a far cry from the ECB’s 2 percent target, the reading may help policymakers argue that inflation in the euro zone is on a clear, albeit gentle, downward path and they can afford to skip raising interest rates at least at their next meeting.

“The latest data point has been consistent with the disinflation trend,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management said.

The ECB raised borrowing costs for the ninth consecutive time last week, but President Christine Lagarde flagged the possibility of a pause in September as inflation pressures showed tentative signs of easing and recession worries mounted.

Prices for services stood out once more, however, as they accelerated to a 5.6- percent annual increase in July from 5.4 percent in June, likely reflecting growth in nominal wages and a greater desire to spend on travel and entertainment after the COVID-19 pandemic.

The stubbornness of inflation in services, along with a new acceleration in the price of food to an alarmingly high 9.2 percent, was likely to strengthen the misgivings of policy hawks at the ECB who fear the high price growth has been getting entrenched.

“Services inflation is the area where monetary policy should have the greatest influence because it reflects domestic demand,” Dirk Schumacher, an economist at Natixis said.

“So ECB policymakers could agree to pause in September but specify that October is very much live.”

Hawks could also point at hard data about growth, which showed the euro zone returned to growth in the second quarter of 2023 despite negative sentiment and activity polls.

The weak survey data has continued to come in in recent days, fueling talk of a recession in the euro area that the ECB is still hoping to avoid.

“Today’s data broadly validated our near-term outlook, which anticipates very weak growth in H2, and a summer moderation in the pace of improvement in inflation followed by a relatively sharp fall in Q4 as some of the temporary effects propping services inflation dissipate,” Oxford Economics said in a note to clients.

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