Euro Zone Inflation Fall Confirmed, Easing Pressure on ECB to Hike

Consumer prices increased by 5.3% in July versus 5.5% in June, extending a downtrend that started last autumn. Meanwhile price growth excluding food and energy, the underlying measure closely watched by the ECB, was flat at 5.5%, Eurostat says, confirming preliminary figures.

"EU inflation rate eased to +5.3%yoy in Jul-23 (Jun-23: +5.5%yoy), the lowest in 1.5-year and well within market expectations. The moderation was mainly attributable to a further deflation in energy prices by -6.1%yoy, the steepest in 3-month sequence. Food inflation also registered the softest pace over a year at +11.6%yoy.

Core Inflation Unchanged

"However, core inflation remained unchanged from Jun-23’s +5.5%yoy, just as the market expected. Prices for transport, the third largest component in the CPI index, rose +0.8%yoy (Jun-23: -0.6%yoy) after deflating for the first time in almost 2.5 years the previous month," analysts from MIDF says.

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Upward pressure also stemmed from price inflation for recreation & culture, which ascended to the highest ever recorded at +6.6%yoy (Jun-23: +5.8%yoy). Meanwhile, housing, water, electricity, gas & other fuels, the second largest component in the index, eased to the lowest level in almost 2.5-year at +0.8%yoy (Jun-23: +2.5%yoy).

Other index components also registered a moderation, except communications prices, which deflated further by -0.1%yoy (Jun-23: -0.3%yoy). On a month-on-month basis, consumer prices contracted by -0.1%mom (Jun-23: +0.3%mom), within the market consensus.

The further moderation in consumer inflation leaves smaller headroom for further tightening by the ECB. Hence, ECB is likely approaching the end of its tightening cycle and will likely pause within the 2HCY23 given the easing inflationary pressure and slowing economy.