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Eurozone Inflation Ticks Up in July Amid Renewed Increase in Energy Prices

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Eurozone Inflation Ticks Up in July Amid Renewed Increase in Energy Prices

The annual inflation rate in the euro area moved higher in July, reinforcing market expectations that the European Central Bank would hike rates at its next monetary policy meeting amid a renewed increase in energy prices as the Middle East war continues.

Flash estimates released by Eurostat on Friday showed that eurozone inflation ticked up to 2.9% in July from 2.8% in June, in line with the consensus estimate. Month over month, consumer prices were 0.2% higher, after previously inching down 0.1%.

The rise in the annual rate was largely attributed to higher energy inflation, which climbed to 10% during the month from the prior 8.5%. Inflation in services and non-energy industrial goods also edged up, while the price growth in food, alcohol and tobacco eased to 1.2% from 1.5%.

Excluding energy, food, alcohol and tobacco, the annual inflation rate stood at 2.5% in July, above the previous and expected 2.4%. On a monthly basis, core consumer prices showed zero growth.

"Fuel prices climbed sharply in July, lifting average pump prices across the eurozone to their highest level since the Middle East conflict began. Because July started while the US-Iran memorandum of understanding was still in place, the effect on this month's inflation figures was relatively modest, but August inflation will be significantly higher if oil prices remain around their current levels," ING said in a quick take note. "While energy inflation is on the move again, the question remains when second round effects will show up in core inflation data."

Among the euro area's top economies, preliminary data showed that harmonized inflation rates in Germany, France and Spain accelerated year over year, while Italy bucked the trend with a decline in the harmonized index of consumer prices.

"So, while the data for July was quite benign, there is still plenty of scope for a further increase in inflation. Especially since the Middle East war remains very unpredictable. The ECB remains on high alert and is likely to raise rates in September again under current conditions," ING added.

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