European Zone Inflation Falls Further, Could This Make the ECB Heave a Breath of Relief?

<p>&nbsp;Euro zone inflation continued to decline in July and most measures of underlying price growth also slowed, signaling the European Central Bank is considering ending a streak of significant interest rate hikes.</p><p><br /></p><p>Consumer prices rose by 5.3% in July compared to 5.5% in June, continuing a downward trend that began in the fall. Excluding energy and raw food, prices rose 6.6% after rising 6.8% a month earlier.</p><p><br /></p><p>Although this is still far from the ECB's 2% target, this reading may help policymakers consider that inflation in the European zone is on a clear, albeit slow, downward path. The ECB is not expected to raise interest rates at least at their next meeting.</p><p><br /></p><p>"The latest data point is in line with the deflationary trend," said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.</p><p><br /></p><p>The ECB raised borrowing costs for the ninth time last week, but President Christine Lagarde signaled a possible halt to a rate hike in September as inflationary pressures show signs of easing and fears of a recession rise.</p><p><br /></p><p><br /></p><p>Services prices again stood out, however, as they jumped to an annual increase of 5.6% in July from 5.4% in June, likely reflecting nominal wage growth and a greater appetite for spending on travel and entertainment following the COVID-19 pandemic.</p><p><br /></p><p>The persistence of inflation in services, together with the recent increase in food prices to a very high 9.2%, is likely to strengthen the doubts of "hawkish" policymakers at the ECB who are wary of price growth.</p><p><br /></p><p>Data on economic output, which shows the European zone returning to growth with an increase of 0.3% in the second quarter of 2023 despite negative sentiment.</p><p><br /></p><p>Waima said half of that increase was due to Ireland, where output was driven by multinationals headquartered there. Weak survey data continued to come in in recent days, raising concerns about a recession in the European zone.</p><p><br /></p><p>The statistics office said retail sales fell by 0.8% in the month. Analysts cited by Reuters had forecast sales to rise 0.2% in the month.</p><p><br /></p><p>"Today's data generally confirms our view in the near term, which predicts very weak growth in the second half of the year, and a slight reduction in the rate of increase in inflation in the summer followed by a relatively sharp decline in the fourth quarter when some temporary effects that underpinning services inflation is waning,” Oxford Economics reported in a note to clients.</p>