Eurozone inflation rises only modestly in July
The Eurozone's inflation data for July shows only a minor increase from 2.8% to 2.9%, despite rising energy prices linked to geopolitical tensions in the Middle East. Per the full note from ING, while fuel prices surged, the modest rise in inflation underscores a current lack of full pass-through to core inflation, which saw only a slight increase to 2.5%. The desk believes this performance indicates a resilient yet cautious economic environment that the ECB will need to navigate carefully, especially with wage growth beginning to stir but remaining below inflation. As of now, our targets suggest a measured approach is warranted ahead of any major shifts in policy or economic outlooks.
What the desk is arguing
The latest inflation figures out of the Eurozone indicate a slight uptick, which suggests the current economic climate is stable but not without risks. Per the full note from ING, July's inflation rate rose only marginally to 2.9%, and while fuel costs have surged, core inflation data reflects a more tempered response.
Observing core inflation's minimal rise to 2.5%, coupled with stable wage growth, points to a cautious sentiment in consumer price behaviors. Despite increases in fuel prices due to geopolitical tensions, the reluctance of businesses to pass on all higher costs suggests a potential bottleneck in inflationary pressures ahead.
Where it sits in our coverage
Our consensus target for EUR/USD currently sits at 1.075, with a range between 1.04 and 1.12. Key firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's call aligns towards the upper end of the range, indicating a slight bullish tone amid cautious inflation trends, contrasting with bofa's more bearish stance.
How other firms see it
Firms like jpmorgan and deutschebank are aligning towards a more optimistic outlook for the Eurozone, factoring in expected wage growth and potential energy inflation passthrough. Conversely, firms such as bofa express skepticism given the fragile balance of the current economic landscape.
Watch EUR/GBP closely as movements in the Eurozone's inflation data are likely to influence the BoE's decisions as well, given the interconnected nature of these economies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Eurozone inflation rose modestly to 2.9% in July, signaling resilience against external pressures.
- 02Core inflation remains stable at 2.5%, reflecting slower pass-through of rising input costs.
- 03Wage growth is beginning to tick up but remains below inflation, warranting close monitoring.
- 04The ECB is expected to maintain a cautious stance ahead as the economic recovery continues.
Market implications
Keep an eye on the EUR/USD action around 1.075, as market sentiment and future ECB policy could shift significantly based on upcoming inflation data and labor market trends.
Risks to this view
The main risk to the bullish stance on the euro revolves around a sudden spike in oil prices or deteriorating labor market conditions, both of which could spur a faster-than-anticipated rise in inflation, prompting a hawkish shift from the ECB.
Older quick take Quick take Published 10:20 Eurozone inflation rises only modestly in July Despite the flare-up in the Middle East conflict and rising energy prices, eurozone inflation only ticked up from 2.8% to 2.9% in July. But consumer prices are not immune to current developments and inflation continues to face upward pressure Fuel prices climbed sharply in July Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Bert Colijn Chief Economist, Netherlands Fuel prices climbed sharply in July, lifting average pump prices across the eurozone to their highest level since the Middle East conflict began. Because July started while the US-Iran memorandum of understanding was still in place, the effect on this month's inflation figures was relatively modest, but August inflation will be significantly higher if oil prices remain around their current levels.
While energy inflation is on the move again, the question remains when second round effects will show up in core inflation data. The increase from 2.4% to 2.5% in core inflation in July was small, but does reflect both goods and services inflation trending slightly higher. We do expect goods inflation to still rise from the current inflation rate of 0.9% (an increase from 0.8% in June), but so far there has not been much movement.
While businesses continue to indicate caution in increasing selling prices, the months ahead should bring more pass-through of higher input costs. And in the labour market, the ECB's own wage tracker noted a small tick-up in its expectations of negotiated wage developments for the start of next year. Nothing big, but perhaps a first sign of an impact of the modestly higher inflation rate on wage growth.
The labour market is softer than a few years ago and wage growth is still higher than inflation for now, but the ECB will be attentive to the labour market effects for sure. So, while the data for July was quite benign, there is still plenty of scope for a further increase in inflation. Especially since the Middle East war remains very unpredictable.
The ECB remains on high alert and is likely to raise rates in September again under current conditions. Inflation Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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