Eurozone inflation increased slightly in July as renewed conflict in the Middle East caused sharp movements in oil prices and maintained pressure on consumer costs.
The latest data will be closely watched by the European Central Bank as policymakers assess whether further interest rate action may be necessary.
Eurozone Inflation Rises to 2.9%
Consumer prices across the 21-member Eurozone increased by 2.9% in the 12 months to July, according to Eurostat, the European Union’s official statistics agency.
The result matched market expectations and was slightly higher than the 2.8% inflation rate recorded in June.
The increase suggests that price pressures remain persistent despite previous efforts by the European Central Bank to bring inflation under control.
Core and Services Inflation Accelerate
Core inflation, which excludes volatile food and energy prices, rose to 2.5% in July from 2.4% in the previous month.
Services inflation also accelerated, reaching 3.3%.
The increase in underlying inflation could concern ECB policymakers because services prices often respond more slowly to changes in monetary policy.
Persistently high core inflation may therefore make it more difficult for the central bank to consider lowering interest rates.
ECB Faces Greater Policy Uncertainty
The European Central Bank is expected to consider the July inflation figures, along with another inflation report due in August, before its next policy meeting in September.
The ECB kept interest rates unchanged earlier in July. However, officials warned that economic uncertainty remained elevated because of the conflict involving Iran.
The central bank also said that the full impact of the resulting energy shock had not yet become visible across the Eurozone economy.
Oil Prices Remain Volatile
Oil prices have fluctuated sharply following renewed air attacks between the United States and Iran.
Concerns that the conflict could spread to other parts of the Middle East have increased uncertainty across global energy markets.
Brent crude futures, the international benchmark for oil prices, were trading at around $89 per barrel. However, the contract briefly moved above $100 per barrel during the previous week.
Oil prices remain significantly higher than they were before the conflict began.
Higher energy costs could place additional pressure on inflation by raising transport, production and household expenses.
Investors Expect Further ECB Rate Hikes
Financial markets are increasingly pricing in the possibility of additional ECB interest rate increases during the coming months.
These expectations have also been supported by signs that the Eurozone economy remains relatively resilient.
The currency bloc expanded by 0.4% during the second quarter, exceeding economists’ expectations.
Stronger economic growth may give the European Central Bank more flexibility to maintain restrictive monetary policy as it continues its effort to control inflation.
