Euro area – the inflation wave

Energy prices lead to higher inflation

According to preliminary data from Eurostat, the inflation rate rose surprisingly from 2.5% to 2.6% in July. The economists surveyed in advance had on average expected a stagnation at 2.5% (Table 1). The reason for the surprise was a year-on-year increase in the often volatile energy prices (from 0.2% in June to 1.3% in July). Contrary to expectations, the inflation rate excluding energy, food and beverages remained at 2.9%. In a year-on-year comparison, inflation for services fell slightly and rose modestly for goods excluding energy and food. All in all, the underlying price pressure in July continued to be significantly higher than would be compatible with the ECB's inflation target.

The inflation wave could recede to below 2% by September...

However, as sharp jumps in energy prices will be excluded from the year-on-year comparison by September, the contribution of energy prices to inflation is likely to weaken in the coming months. In September, the inflation rate could even dip below the ECB's target of 2%.

... only to rise again in the fall.

However, the wave-like movement of inflation also means that the previous year's rate will rise again by the end of the year after a temporary low in September. This is also supported by the high underlying inflationary pressure, which has once again become clear in today's data. Service prices have risen more strongly again in a 6-months comparison since the beginning of the year. High wage settlements should continue to support this trend. In addition, inflation for goods excluding energy and food has not fallen for several months (Chart 1). Due to rising producer prices for intermediate goods and soaring freight rates in the container shipping network, a trend reversal is likely to occur here, meaning that goods prices will rise somewhat more strongly again. All in all, we expect the inflation rate to rise to 2.7% in the fourth quarter.

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