Eurozone Inflation Remains Delightfully Dull Ahead Of September ECB Meeting

The eurozone inflation environment remains very sanguine for the moment. Inflation is close to target, and core inflation – while still slightly above target for the moment – is quite stable. The services inflation rate ticked down from 3.2 to 3.1% while goods inflation remained steady at 0.8%. Energy prices are holding firm at a relatively low level, which is in part due to favourable exchange rate developments, but overall energy prices have also stayed quite stable.

Current risks around the global economy are considerable, which brings about inflationary risks to both the downside and the upside. Still, the data so far points to inflation remaining around the European Central Bank's 2% target. Selling price expectations don't show any clear signs of changing direction for the moment. Consumers expect inflation to come in at 2.5%, down somewhat from what we saw in spring.

The labour market continues to show strength, with unemployment falling in recent months to 6.2%. But despite job market strength, wage growth continues to moderate. Negotiated wage growth is still bouncing around on one-off effects, but the ECB's forward-looking wage tracker (without one-off payments) is steadily expecting a further easing of wage growth towards the end of the year. With 2.5% wage growth expected by March of 2026, this could actually translate into a slightly softer inflation rate.

So inflation is around target for the moment, and is expected to be at target in the medium-term according to the June ECB staff projections. The economy is showing some signs of slight improvement, but nothing spectacular. With interest rates set at neutral levels, you could argue that this is a logical time for the ECB to keep rates on hold. But still, with slow growth, significant risks of downside surprises still prevalent, and the Federal Reserve expected to resume cutting rates again, the doves on the governing council could still push for one more cut before holding steady. Succeeding at that would be a tall order, as the case for holding steady is now quite solid.

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