Eurozone Consumer Inflation Holds Steady in July

• Annual CPI: 2.0% (unchanged from June)
• Core CPI (excluding food and fuel): 2.3%
• Month-on-Month CPI: 0.0% (flat after a 0.3% gain in June)

Key Highlights:

1. Inflation Dynamics:
   • Inflation remains within the European Central Bank’s (ECB) target, easing pressure on policymakers for further rate cuts after the end of the easing cycle last month.
   • Inflation in Germany eased to 1.8% (from 2.0%), Italy dropped to 1.7% (from 1.8%), and France stayed at 0.9%. However, Spanish inflation rose to 2.7% (from 2.3%).
   • The rapid price growth from post-pandemic demand, supply chain disruptions, and the war in Ukraine appears to have subsided.
2. ECB’s Policy Outlook:
   • The ECB held rates steady at 2% last week, following eight rate cuts since June 2024.
   • Eurozone’s Economy: ECB’s recent assessment suggests some optimism, but the impact of ongoing U.S. tariffs on European imports raises concerns.
   • ECB projects a modest undershooting of the 2% inflation target for the next 18 months, with inflation expected to return to 2% by 2027.
3. U.S. Tariffs on European Exports:
   • A 15% tariff on most European exports will be implemented, marking the highest tariff since the 1930s.
   • Although the tariff rate is lower than previously threatened, it remains a significant factor in potential economic disruption.
4. Market Expectations:
   • Interest Rate Cuts: Markets now see less than a 50% chance of another rate cut by the ECB this year.
   • Interest Rate Hike: Some investors are beginning to price in a potential rate hike towards the end of 2026 due to economic uncertainty, inflation control, and U.S. tariff impacts.

Implications:

• The ECB appears less likely to ease further, especially with inflation stabilizing at the target.
• Trade tensions, particularly U.S. tariffs, could weigh on the eurozone economy, but with manageable inflation, the ECB might not be under significant pressure to adjust rates.
• U.S.-EU trade relations will be a key risk factor for the eurozone’s economic outlook, especially given the potential impact on growth and inflation.