European Inflation Slows In July, But Will The ECB Change Its Way?

<p>&nbsp;Eurostat data on Friday showed eurozone inflation rates were slowing and underlying price pressures also appeared to have peaked, indirectly easing pressure on the European Central Bank to keep raising rates after the fastest rate-hiking cycle in its history.</p><p><br /></p><p>The ECB has raised rates from negative levels to the highest level in two decades in just a year to tackle a surge in inflation and policymakers are considering whether they have done enough to get price growth back on track to 2%.</p><p><br /></p><p>Consumer prices rose 5.3% in July compared to 5.5% in June, extending a downward trend that began last fall. Meanwhile, price growth excluding food and energy, a deeper measure monitored by the ECB, remained at 5.5%, Eurostat reported, confirming earlier estimates.</p><p><br /></p><p>However, services inflation rose to 5.6% from 5.4%, which could be a concern as service costs are driven by wages and tend to remain stable.</p><p><br /></p><p><br /></p><p>This relatively subdued number is believed not to resolve the ECB's rate dilemma and markets still expect one more rate hike, to 4%, this year, although probably not in September.</p><p><br /></p><p>Underlying price pressures remain strong and so does the labor market, suggesting wage pressures will continue.</p><p><br /></p><p>This could lead to continued high inflation and the market sees price growth remaining above 2% in the coming years, suggesting that reaching 3% will be easy but the last level of inflation reduction is seen as very difficult.</p><p><br /></p><p>On the other hand, economic growth stagnated, investment decreased and overall consumption remained flat. Probability suggests price pressures will ease as the economy struggles.</p><p><br /></p><p>Energy prices, one of the main causes of the previous surge, are now significantly lower and this will also eventually impact consumers, albeit with a delay.</p>