Inflation data more positive than it seems
At first glance, the euro inflation figures for July look like a pure disappointment. Contrary to the expectations of most economists, headline inflation rose to 2.6%, and core inflation was higher than expected. Nonetheless, those in the ECB Governing Council who are in favour of a rate cut in September can take some positives from the latest price data.
For once, it was not service prices that were responsible for the rise in the inflation rate. Instead, significantly higher energy prices once again were the culprit. This is a significant difference for central bankers. While price increases for services are likely to remain high for some time to come due to high wage growth, the effects of higher energy and transport costs could be phased out more quickly. The rise in July inflation is, therefore, not necessarily at odds with the ECB's forecast that inflation will fall to the target value of 2% in 2025 after a zigzag course.
The doves in the ECB Governing Council are likely to see the price data as confirmation of this assumption. For one thing, the high service inflation has at least fallen slightly. Secondly, the monthly inflation rates paint a much more favourable picture than the year-on-year comparison. Compared to June, prices have stagnated. Seasonally adjusted, services inflation rose by 0.3%. Although this is a lot, it is in line with the ECB's forecast that the core rate will fall in future.
However, a rate cut in Setpetmber is still not a done deal – even if it is likely. Not only because the hawks in the ECB Governing Council can rightly point to the inflation data as evidence that inflation continues to be extremely stubborn, and the path to the inflation target is rocky.
Wage data published at the end of August and the beginning of September will play an essential role in steering monetary policy. If there are any clearly negative surprises here, the ECB will probably not be able to justify a rate cut in September. This is because the forecast that the inflation target will be reached by the end of 2025 will then begin to waver. The ECB cannot afford to fail in this respect - it would massively damage its credibility.
