Inflation on the Rise in Europe and Italy: Is the ECB on High Alert?

Surprising Inflation Increase in Eurozone

In the preliminary data for July, inflation unexpectedly rose to 2.6% in the Eurozone.
This unexpected increase provides relevant insights for ECB officials ahead of the September 11-12 meeting, where investors expect a second rate cut following the initial cut in June.

Diverging Trends Across the Eurozone

The inflation readings across the region have been mixed.
In Germany, the largest economy, price growth accelerated unexpectedly, while Spain showed a surprisingly drastic slowdown.
France and Italy also experienced higher rates.
How much have prices increased in our country? The latest data.

Return of Inflation Alert in Eurozone and Italy

Inflation in the Eurozone unexpectedly rose in July in flash data, despite a widely observed indicator of price growth in the services sector showing a slowdown.

According to Eurostat’s estimate, price increases in the 20 Euro-sharing countries accelerated to 2.6% in July from 2.5% in June.
A key indicator of underlying price growth, excluding energy, food, alcohol, and tobacco, failed to show the expected decline and remained steady at 2.9%.

One positive note is that the increase in services inflation dropped to 4.0% from 4.1% in June.

Impact on ECB’s Policy Trajectory

Investors noted that consumer price growth in the Eurozone has exceeded the 2% target every month since mid-2021, frustrating central bank policymakers.
The inflation rates come just a day after the publication of the Eurozone’s second-quarter GDP, which grew by 0.3% in the three months ending in June, surpassing economists’ expectations.

The investors are now assessing how the new data will influence the ECB’s trajectory for potential future interest rate cuts.

Italian Inflation Report

In Italy, inflation slightly rose to 1.3% in July, reflecting a moderation in the year-on-year decline in energy prices.
Monthly inflation increased by 0.5%, while the annual Harmonised Index of Consumer Prices rose to 1.7%, the highest value since last October.

The ECB has kept rates steady after cutting them in June, with the option for another cut in September still on the table but not officially confirmed.
President Lagarde warned at the beginning of July that inflation is expected to remain above target for a significant part of next year.

The ECB believes that inflation will stay above the target “for much of the next year,” President Christine Lagarde warned at the beginning of July.
The central bank’s assessment is further complicated by evidence of uneven growth in data released this week, with the German economy unexpectedly contracting in the second quarter while France and Spain both exceeded expectations and Italy slowed slightly.

Investors are currently pricing in at least two more rate cuts this year.