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The
ECB has lifted rates from deep in negative territory to
two-decade-highs in just a year to combat a historic surge in
inflation and policymakers are now contemplating whether they
have done enough to put price growth back on a path to 2%.
Consumer prices increased by 5.3% in July versus 5.5% in June,
extending a downtrend that started last autumn. Meanwhile price
growth excluding food and energy, the underlying measure closely
watched by the ECB, was flat at 5.5%, Eurostat said, confirming
preliminary figures.
Services inflation, however, picked up to 5.6% from 5.4%, a
potential worry since services costs are heavily driven by wages
and tend to be sticky.
The relatively benign figures are not likely to settle the ECB's
dilemma on rates and markets still expect once more rate hike,
to 4%, this year, even if not necessarily in September.
Policymakers are pulled in opposing directions by incoming data.
Underlying price pressures are still strong and the labour
market is unusually tight, suggesting that wage pressures will
persist as workers enjoy superb bargaining power.
This could perpetuate high inflation and markets see price
growth holding above 2% for years to come, suggesting that
getting down to 3% will be easy but the last mile of
disinflation is seen as painfully difficult.
But economic growth is stagnating, investment is falling and
overall consumption is flat, at best, suggesting that price
pressures should ease as the economy suffers.
Energy prices, a key culprit of the earlier surge, are now
sharply lower and this too, will eventually feed through to
consumers, even if with a lag.
(Reporting by Balazs Koranyi; Editing by Sharon Singleton)
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