Last week, European Central Bank (ECB) President Christine Lagarde responded to questions about whether the deposit rate would remain at a record high or if there would be a hike in September with a vague decisive maybe. Now, with the release of consumer price data for July, the inflation numbers have left analysts puzzled and Lagarde facing uncertainty.
While headline inflation decreased from 5.5% in June to 5.3% in July, the core measure, which excludes energy, food, alcohol, and tobacco, remained unchanged at 5.5%, even higher than in May. Adding to the frustration, service prices surged at a new record pace of 5.6%. Lagarde’s colleagues who advocate for a tighter stance on inflation will argue that this rapid increase is too high to bring inflation back to the ECB’s 2% target. On the other hand, markets remain uncertain, with derivatives pricing data collected by Refinitiv indicating a 70% chance of a rate pause in September.
The ECB still has time to assess the situation. Revisions to the July numbers are expected, and policymakers will have access to inflation data for August before their September 14 meeting. Considering the weakening euro zone economy—where a 0.6% annualized rise in second-quarter GDP was driven by one-off factors—ECB rate-setters may find solace in the fact that they will be on holiday for the next month or so.
By Francesco Guerrera
