Eurozone inflation fell in line with expectations to 5.3 per cent in July, after the single currency bloc returned to growth in the second quarter.
Eurostat, the EU’s statistical office, said inflation in the 20-country single currency bloc was down from 5.5 per cent in June.
But core inflation, which excludes energy and food prices to give a clearer sign of underlying price pressures, was unchanged at 5.5 per cent.
The figures were a setback for the European Central Bank, which raised interest rates for the ninth consecutive time last week. The central bank has said it will keep increasing borrowing costs until underlying price pressures are clearly falling towards its 2 per cent target.
“July’s inflation data will have been a disappointment for policymakers,” said Andrew Kenningham, an economist at consultants Capital Economics, predicting services prices would fall only slowly from a record high in July and “keep the ECB from pivoting to rate cuts until well into next year”.
Hopes of a soft landing for the eurozone economy were bolstered by separate figures from Eurostat showing it rebounded with growth of 0.3 per cent in the second quarter, despite the ECB’s unprecedented rise in borrowing costs over the past year. The eurozone stagnated in the previous quarter.
However, growth in the bloc was skewed upwards by a 3.3 per cent surge in Irish gross domestic product in the period, which has been volatile owing to shifts in intellectual property by large US pharmaceutical and technology companies with EU headquarters in the country.
Italy became the weakest performer of the eurozone’s big economies in the second quarter after output contracted 0.3 per cent from the previous quarter because of a decline in Italian industry and farming output that outweighed slight growth in services.
The shrinking of Italy’s economy marked a deterioration from 0.6 per cent growth in the first quarter and was below the stagnation forecast by economists in a Reuters poll. Italy’s statistics agency said domestic demand made a negative contribution while foreign trade — including tourism — was neutral.
But economists said the Italian downturn was likely to have been triggered by the recent ending of a “Superbonus” scheme, which had triggered a boom in home improvement after offering Italians tax credits worth 110 per cent of any energy efficiency work on their homes.
“We are confident that the biggest drag will have come from investment, which likely fell sharply after rising for eleven straight quarters as the Superbonus tax relief was eased, lending standards were tightened and interest rates rose further,” said Melanie Debono, an economist at research group Pantheon Macroeconomics.
ECB president Christine Lagarde told French newspaper Le Figaro that GDP figures from France, Germany and Spain were “quite encouraging” and supported its forecast for eurozone growth of 0.9 per cent this year, which many economists see as over-optimistic.
Some politicians, particularly in Italy, have criticised the ECB for raising rates too high and warning it risks dragging Europe into a recession. But Lagarde stressed her determination to “have a thick skin” and to “keep sight of the objective of lowering inflation”.
Inflation in the eurozone has fallen more slowly than in the US, where it was 3 per cent in June, but faster than in the UK, where it slowed to 7.9 per cent last month.
Eurozone energy prices fell 6.1 per cent in the year to July, a slightly bigger fall than in June. There was also a slowdown in food, alcohol and tobacco inflation to 10.8 per cent and in industrial goods inflation to 5 per cent. Services prices accelerated, however, at a new high of 5.6 per cent.
Inflation fell in 15 of the 20 countries that share the euro, but rose in Spain, Finland, Greece and Luxembourg. Price growth was below the ECB’s 2 per cent target only in Belgium.
Source: Economy - ft.com
