The eurozone's inflation rate rose to 2.9% in July, strengthening the case for the European Central Bank to raise interest rates again in September in order to counter price pressures stemming from the Middle East conflict. The preliminary reading, released by the European Union on Friday, aligned with economists' expectations from a Reuters poll, with the inflation rate exceeding June's 2.8% figure, driven by renewed increases in fuel and natural gas prices. This marks the fifth consecutive month that inflation in the 21-member eurozone has remained above the ECB's 2% medium-term target. Inflation rose across France, Germany, and Spain; all member states except Estonia recorded inflation rates above the ECB's 2% target. This data follows Thursday's figures, which showed the eurozone economy demonstrating relative resilience to the current energy shock, with second-quarter gross domestic product growing by 0.4%, better than market expectations. The Middle East conflict shows no signs of abating. ECB President Christine Lagarde warned that the energy shock could intensify further, with its impact on other goods prices and wages potentially exceeding expectations, thereby pushing up overall inflation. After raising interest rates by 25 basis points in June, the ECB kept its benchmark rate unchanged at 2.25% last week but signaled that a further rate hike in September remained possible. Lagarde stated that policymakers would be "closely monitoring in the coming weeks" for signs of widespread price increases. Kamil Kowal, head of eurozone forecasting at Moody's Analytics, said that given the changes in the Middle East situation in July, this inflation data "will firmly drive the ECB to initiate a rate hike in September." Neil Burrell, chief investment officer at PremierMiton, said that unless there is a significant shift in the situation and economic outlook, it will be difficult to prevent policymakers from raising rates in September. Friday's data showed that the rise in inflation was primarily driven by energy prices. Energy prices were up 10% year-on-year, accelerating from an 8.5% increase in June. Services inflation, a key indicator of underlying price pressures in the economy, has remained significantly above the ECB's 2% target for three years; in July, it rose to 3.3% from 3.2% in June. Core inflation, which excludes volatile food and energy prices, unexpectedly ticked up to 2.5% from 2.4%. Bert Colijn, Chief Economist at ING Groep NV, said there is still room for inflation to rise further in the coming months. "If oil prices remain at current levels, August inflation data could show a significant increase," he noted, adding that there are already preliminary signs of rising wage pressures. Brent crude oil prices, which had fallen below the pre-conflict level of $72.48 per barrel at the end of June, have since surged significantly to around $89 per barrel. Food inflation, a key indicator influencing household expectations for future prices, is currently a moderating factor: it fell to 1.2% in July, continuing its downward trend for the year. Following the release of the inflation data, the euro was little changed, edging down 0.1% against the US dollar to €1 equals $1.152. Implied pricing in the interest rate swap market showed that after the ECB's monetary policy decision, traders continued to wager on one or two additional 25-basis-point rate hikes by the end of the year; the market assigns roughly an 85% probability to the first rate hike occurring in September.
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