Eurozone inflation disappoints, but signs of consumer pushback bode well for the outlook

Looking at the main drivers, energy came in stronger, rising 1.3% y/y (June: 0.2%), with the recent rise in petrol prices and higher administrative gas tariffs in France offset to a lesser degree than expected by the continued falls in wholesale energy prices (as indicated by the energy PPI). Services inflation fell marginally to 4% from 4.1%; we had expected a bigger drop to 3.8%. On the positive side, services inflation in France fell by more than expected, despite the expected bump from the Olympics. Indeed, news reports suggest that hoteliers and airlines are having to lower prices with travelers clearly becoming more price-sensitive. This kind of pushback bodes well for the medium term inflation outlook. Food inflation also edged further lower, to a new 2 & 1/2 year low of 2.3%, albeit the fall here was also somewhat less than we projected. Goods inflation was broadly steady at a subdued 0.8% y/y, having hovered in a 0.7-0.9% range for the past 5 months.

ECB still likely to cut in September – The data is likely broadly consistent with the ECB’s expectation for July, based on its quarterly projection for Q3 and the strong downward base effects which will push inflation lower in August and September. Following today’s figure, we expect inflation to fall to 2.2% in August and be back at the 2% target in September. This would leave the average for Q3 at 2.2%, which is slightly below the ECB’s 2.3% Q3 forecast from the June projections. We continue to expect the ECB to resume rate cuts in September.