Unexpected Rise In Eurozone Inflation Casts Doubt Over ECB September Rate Cut

(RTTNews) - Euro area inflation rose unexpectedly in July and services price growth continued to remain high, adding uncertainty over the likelihood of a September interest rate cut by the European Central Bank.

The harmonized index of consumer prices advanced 2.6 percent year-on-year in July, faster than the 2.5 percent increase in June, flash data from Eurostat showed on Wednesday.

The headline figure was expected to remain unchanged at June's rate of 2.5 percent.

Core inflation that strips out prices of energy, food, alcohol and tobacco, held steady at 2.9 percent, while it was forecast to slow to 2.8 percent.

On a monthly basis, consumer prices remained flat in July, data showed. All components of the HICP increased from the previous year. Services cost increased the most in July, up by 4.0 percent but slightly weaker than June's 4.1 percent. This was followed by the 2.3 percent increase in food, alcohol and tobacco prices and 1.3 percent rise in energy prices. Non-energy industrial goods prices moved up only 0.8 percent.

Earlier this month, the European Central Bank left its key interest rates unchanged after lowering them for the first time in five years in the previous session and hinted at a rate cut in September.

The small fall in services inflation in July means a rate cut in September is more likely than not, but it is not a done deal, Capital Economics' economist Franziska Palmas said.

"And until services inflation falls more significantly the ECB is likely to continue to ease policy only slowly," the economist said.

While the downtrend in inflation remains intact, today's figures make a September rate cut from the ECB a very close call, ING economist Peter Vanden Houte said.

Among big-four economies, harmonized inflation in both Germany and France rose to 2.6 percent in July from 2.5 percent in June.

Italy's inflation advanced more markedly to 1.7 percent from 0.9 percent. Meanwhile, Spain's inflation softened to 2.9 percent from 3.6 percent.