Eurozone inflation accelerated unexpectedly but economists did not think this would stand in the way of a further interest rate cut in September.
Figures released today showed that prices rose 2.6 per cent in July, ahead of the 2.5 per cent expected by economists.
Core inflation, which strips out volatile components like food and energy, held at 2.9 per cent for the third consecutive month. Economists had expected a slight deceleration.
The increase in the headline rate was driven by a relatively sharp increase in energy prices, which rose 0.9 per cent month-on-month. This was largely expected by economists.
Services inflation remained the most stubborn pressures, with prices in the sector rising 4.0 per cent in the year to July. However, this was down from 4.1 per cent in June, the first deceleration in three months.
Rate-setters are paying close attention to developments in services inflation, which is seen as a more accurate gauge of domestic price pressures than the headline number.
The figures will complicate life for rate-setters at the European Central Bank (ECB) as they consider whether to lower rates again in September.
The ECB cut interest rates for the first time in five years back in June, but left rates on hold in July owing to concerns about the persistence of inflation.
Policymakers have been reluctant to provide any further guidance on the future path of rates. At the July meeting, Christine Lagarde, president of the ECB, said September’s decision was “wide open”.
There’s one further inflation reading to come before the September meeting which will be crucial for determining whether policymakers back a further cut.
Nevertheless, a number of economists suggested that July’s figures would not stand in the way of a further cut in September.
“The small fall in services inflation in July is probably just enough for a September rate cut to remain the base case,” Franziska Palmas, senior Europe economist at Capital Economics said.
Analysts at Nomura agreed that the figures continued to “support a September ECB rate cut”, noting that underlying momentum in services inflation is slowing.
However, Peter Vanden Houte, chief eurozone economist at ING, said September’s decision would be a “close call” after the figures.
“The latest data has not given the ECB the certainty it needs to confirm that the inflation battle has been won,” he said.