Benign figures suggest euro zone inflation remains on target

Reuters

4 days ago

FRANKFURT, July 31 (Reuters) - Inflation in some of the euro zone's biggest economies was at or just above expectations this month, indicating that price growth in the broader currency bloc remained near the European Central Bank's 2% target.
Euro zone inflation eased back to 2% this summer after years of overshooting and the central bank now sees it hovering near this level, even as a few policymakers now fear that risks have shifted to undershooting.
Inflation in Italy eased to 1.7% in July from 1.8% in June, coming above expectations for 1.6% while price growth in France was unchanged at 0.9%, above expectations for 0.8%, official figures showed on Thursday.
The data, combined with an anticipated jump in Spanish inflation to 2.7% from 2.3%, suggests a modest upside risk in the euro zone figure, which is due on Friday and is seen by economists at 1.9% after a 2.0% reading in June.
Such a small miss is unlikely to concern the ECB, however, after it made clear it considered inflation defeated and was not in any hurry to move rates again after halving them to 2% in the year to June.
The ECB is also keen to hold out until it gains more clarity on how the evolution of a global trade conflict will impact prices.
Tariffs, imposed by President Donald Trump on U.S. imports, are expected to weigh on prices for now since they slow global trade and economic growth, but a major realignment is corporate value chains could actually raise price pressures further out.
For now, the ECB sees inflation dipping under 2% in the coming months and projects an 18-month period of undershooting before price growth returns back to 2% in 2027.
This muted inflation picture and relatively resilient growth are why financial investors think the ECB is close to done cutting rates. Markets see less than a 50% chance of another rate cut this year and they have started to price in a hike towards the end of 2026.
Friday's euro zone inflation reading is also going to be influenced by Germany but figures from various German states showed only modest changes compared to the previous month.
Euro zone inflation is expected by policymakers to remain near 2% as still quick price growth in services will be offset by energy and goods prices.
The stronger euro and muted wage growth are also exerting some downward pressure on prices, enough to counter upward pressure from increased government spending on things like defence or infrastructure.