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Euro-zone Final HICP (July)

Final inflation data for July underline that price pressures remain strong and broad-based. With wholesale natural gas and electricity prices having surged again in the weeks since July, retail gas and electricity prices are set to rise steeply in the coming months, keeping the headline rate high.

Underlying inflation still rising

  • Final inflation data for July underline that price pressures remain strong and broad-based. With wholesale natural gas and electricity prices having surged again in the weeks since July, retail gas and electricity prices are set to rise steeply in the coming months, keeping the headline rate high.
  • Confirmation today that headline HICP inflation rose to 8.9% in July and core inflation (excluding prices of energy, food, alcohol and tobacco) rose to 4.0% will do nothing to ease concerns about the wave of stagflation hitting the euro-zone. (See Chart 1.) That said, those figures were unchanged from the flash estimate published in late July, so the interest today is largely in the breakdown.
  • The key concern for policymakers is the increase in core inflation as core goods HICP rose to 4.5% y/y and services to 3.7%. The rate of inflation of a broad range of goods increased, including motor vehicles and furniture, for example. (See Chart 2.) And higher services inflation was not just down to re-opening effects – the rate of inflation for package holidays and accommodation actually edged down in July. (See Chart 3.)
  • Meanwhile, although energy inflation edged down, from 42.0% in June to 39.6%, it still accounted for 4.0 percentage points of the headline rate. Falling crude oil prices pulled down the price of fuel for personal transport by 2.4% m/m but this was largely offset by a 3.4% m/m rise in electricity and gas prices.
  • Looking ahead, energy inflation is set to remain higher for longer than we had previously anticipated because wholesale gas and electricity prices (which are closely linked) have surged since July. (See Chart 4.) We also now know that German gas prices will jump in October when the new energy levy is introduced, potentially adding one percentage point to headline inflation in Germany.
  • All told, the euro-zone is still experiencing a broad-based increase in inflation which will leave the ECB little choice but to tighten policy rapidly in the coming months. We expect the Bank to raise its deposit rate from zero to 0.5% in September and to +1.25% by year-end.

Chart 1: HICP Inflation (%)

Chart 2: Motor Vehicles & Furniture Inflation (%)

Chart 3: Accommodation
& Package Holiday HICP (% y/y)

Chart 4: Baseload Electricity Futures Prices (30-day Average €/MWh, Germany)

Sources: Refinitiv, Capital Economics


Andrew Kenningham, Chief Europe Economist, andrew.kenningham@capitaleconomics.com

Andrew Kenningham Chief Europe Economist
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