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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.

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