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Euro Zone Inflation Falls Further in Comforting Sign for ECB

  • Most measures of underlying inflation fall
  • Services prices accelerate on travel boom
  • GDP rebounds on Irish boost


FRANKFURT, July 31 (Reuters) - Euro zone inflation fell further in July and most measures of underlying price growth also eased, in a largely comforting sign for the European Central Bank as it considers ending its severe run of interest rate hikes.

Consumer prices grew by 5.3% this month versus 5.5% in June, extending a downwards trend that started in the autumn. Excluding energy and unprocessed food, prices increased by 6.6% after a 6.8% rise a month earlier.


While this is still a far cry from the ECB's 2% target, the reading may help policymakers argue that inflation in the euro zone is on a clear, albeit gentle, downward path and they can afford to skip raising interest rates at least at their next meeting.

"The latest data point has been consistent with the disinflation trend," Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said.

Large sellers of consumer goods like Unilever, brewer Heineken and food giant Nestle have all signalled to varying degrees that they expected the bulk of the price hikes to be behind us.

The ECB raised borrowing costs for the ninth consecutive time last week, but President Christine Lagarde flagged the possibility of a pause in September as inflation pressures showed tentative signs of easing and recession worries mounted.

Prices for services stood out once more, however, as they accelerated to a 5.6% annual increase in July from 5.4% in June, likely reflecting growth in nominal wages and a greater desire to spend on travel and entertainment after the COVID-19 pandemic.

The stubbornness of inflation in services, along with a new acceleration in the price of food to an alarmingly high 9.2%, was likely to strengthen the misgivings of policy hawks at the ECB who fear the high price growth has been getting entrenched.

"Services inflation is the area where monetary policy should have the greatest influence because it reflects domestic demand," Dirk Schumacher, an economist at Natixis said.

"So ECB policymakers could agree to pause in September but specify that October is very much live."

Hawks could also point at hard data about economic output, which showed the euro zone returned to growth with a 0.3% increase in the second quarter of 2023 despite negative sentiment and activity polls.

But half of that increase was due to Ireland, where output was boosted by multinationals headquartered there.

And the weak survey data has continued to come in in recent days, fuelling talk of a recession in the euro area that the ECB is still hoping to avoid.

The federal statistics office said retail sales were down 0.8% month-on-month. Analysts polled by Reuters had predicted sales to rise 0.2% on the month.

"Today's data broadly validated our near-term outlook, which anticipates very weak growth in H2, and a summer moderation in the pace of improvement in inflation followed by a relatively sharp fall in Q4 as some of the temporary effects propping services inflation dissipate," Oxford Economics said in a note to clients.

Additional reporting by Richa Naidu and Phil Blenkinsop; Editing by Peter Graff and Alison Williams

Source: Reuters

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