Euro zone inflation rises to 2.9% in July, reinforcing ECB rate hike expectations

Consumer prices across the euro zone ticked higher in July, with inflation climbing to 2.9% from 2.8% in June, as war-driven energy costs pushed headline figures back up and reinforced expectations that the European Central Bank will raise interest rates again in September.

Energy Prices Drive the Uptick

Eurostat data Euronext N.V. released on Friday showed that inflation in the 21-nation euro area rose in line with forecasts, with an Iran-conflict-induced oil price surge the primary driver. Core inflation, which strips out volatile food and energy prices, accelerated to 2.5% from 2.4%, while services inflation rose to 3.3%, signaling that price pressures are broadening beyond energy.economictimes

National data released earlier in the week previewed the increase. Germany's annual inflation rate jumped to 2.8% in July from 2.3% in June, with energy prices surging 8.3% year-on-year compared with 3.4% the prior month, according to preliminary data from the federal statistics office Destatis. Core inflation in Germany, however, edged down to 2.4% from 2.5%. In France, annual inflation rose to 2.1% in July, defying expectations of a slower pace.aa+2

ECB Rate Hike Path Solidifies

The data lands squarely in the middle of an already well-signaled path toward further monetary tightening. The ECB raised its deposit facility rate by 25 basis points to 2.25% in June — its first hike in nearly three years — after the Iran war drove euro zone inflation to 3.2% in May. At its July meeting, the Governing Council held rates steady but kept the door open to another increase in September.cnbc+3

ECB President Christine Lagarde warned that renewed Middle East hostilities and the resultant rebound in oil prices posed upside risk to the inflation outlook. Markets are now pricing in a September hike as near-certain, with some traders anticipating a further move by early 2027.economictimes+1

Growth Cushion Eases Recession Fears

The rate hike case is bolstered by resilient growth. The euro zone economy expanded by 0.4% in the second quarter, twice as fast as expected, easing fears that tighter policy could tip the bloc into recession. Economists remain more cautious than markets, with many expecting only one additional hike on the grounds that high energy prices have yet to generate second-round effects in wages. Food inflation continued to slow in July, and non-energy industrial goods prices — reflecting cheaper Chinese imports — rose just 0.9%, partially offsetting the energy shock.economictimes