Euro Zone Inflation Rises in July Amid Services Sector Easing

Euro zone inflation rose to 2.6% in July, according to Eurostat, despite a decline in price growth in the services sector. While core inflation remained unchanged at 2.9%, the European Central Bank is still expected to proceed with interest rate cuts in September and December, citing eventual inflation easing.

Euro zone inflation unexpectedly increased to 2.6% in July, despite a decline in price growth in the services sector, according to data released on Wednesday. The widely watched gauge of price growth eased, but core inflation stayed unchanged at 2.9%, excluding energy, food, alcohol, and tobacco.

Analysts maintained their expectations of interest rate cuts by the European Central Bank (ECB) in September, despite the surprise data. Fabio Balboni of HSBC noted the persistent high inflation in services but remained confident in the ECB's planned cuts. Market investors share this sentiment, expecting inflation to eventually ease.

The ECB has observed a significant drop in inflation from its peak in late 2022. However, inflation has recently stalled due to increased service sector prices driven by higher wages. The services' price growth saw a slight easing to 4.0% from 4.1% in June, thanks in part to consumer resistance against perceived price-gouging during the Paris Olympics.

The central bank remains focused on the broader trend and anticipates inflation will stabilize at around current levels throughout the year before gradually moving towards its 2% target by 2025. The ECB started rate cuts last month and plans a gradual reduction over the next 18 months following some of its steepest hikes in history.

(With inputs from agencies.)