FRANKFURT (Reuters) – Euro zone inflation slower further and even underlying price pressures appear to have peaked, Eurostat data showed on Friday, easing pressure on the European Central Bank to keep raising rates after its fastest rate-hike cycle on record.
The ECB has lifted rates from deep in negative territory to two-decade-highs in just a year to combat a historic surge in inflation and policymakers are now contemplating whether they have done enough to put price growth back on a path to 2%.
Consumer prices increased by 5.3% in July versus 5.5% in June, extending a downtrend that started last autumn. Meanwhile price growth excluding food and energy, the underlying measure closely watched by the ECB, was flat at 5.5%, Eurostat said, confirming preliminary figures.
Services inflation, however, picked up to 5.6% from 5.4%, a potential worry since services costs are heavily driven by wages and tend to be sticky.
The relatively benign figures are not likely to settle the ECB’s dilemma on rates and markets still expect once more rate hike, to 4%, this year, even if not necessarily in September.
Policymakers are pulled in opposing directions by incoming data.
Underlying price pressures are still strong and the labour market is unusually tight, suggesting that wage pressures will persist as workers enjoy superb bargaining power.
This could perpetuate high inflation and markets see price growth holding above 2% for years to come, suggesting that getting down to 3% will be easy but the last mile of disinflation is seen as painfully difficult.
But economic growth is stagnating, investment is falling and overall consumption is flat, at best, suggesting that price pressures should ease as the economy suffers.
Energy prices, a key culprit of the earlier surge, are now sharply lower and this too, will eventually feed through to consumers, even if with a lag.