Market Analysis

Inflation in the 20 eurozone countries rose to 2.6% in July, staying above the European Central Bank's (ECB) target and complicating its decision on whether to cut interest rates to stimulate growth amid an ongoing economic struggle.

According to Eurostat, inflation increased from 2.5% in June. Services inflation, a key metric for the ECB, remained high at 4.0%, slightly down from 4.1%.

This uptick in inflation will likely intensify discussions about the ECB's next move at its September 12 meeting. The ECB made a tentative interest rate cut in June, reducing its benchmark rate by a quarter percentage point to 3.75%. At the July meeting, the ECB paused further cuts, with President Christine Lagarde stating that future decisions would be based on incoming data.

The ECB, alongside other central banks like the U.S. Federal Reserve, had rapidly raised interest rates to counter a surge in inflation caused by Russia's invasion of Ukraine and the subsequent spike in energy prices, as well as the post-pandemic economic rebound that strained supply chains. Europe was particularly affected by higher energy prices after Russia curtailed most natural gas supplies.

Although energy prices have fallen and inflation has decreased from its peak of 10.6% in October 2022, it remains between 2% and 3%, short of the ECB's 2% target deemed optimal for the economy. Rate hikes aim to curb inflation by increasing borrowing costs, thus cooling demand for goods and reducing price pressure. However, higher rates can stifle growth, and recent economic data suggest Europe is still struggling to achieve a solid recovery after more than a year of stagnation.

Gross domestic product (GDP) grew by 0.3% in each of the first two quarters of this year, an improvement from zero or negative growth. Yet, forward-looking economic indicators, such as S&P Global's purchasing managers' index, indicate the economy is still barely growing.

Paraphrasing text from "Reuters" all rights reserved by the original author.