In July, eurozone inflation rates held flat, surprising experts with an expected increase. Core inflation held firm at 2.3% for the third month running. The region has experienced two months of core inflation mirroring the European Central Bank’s goal almost exactly. This reduced volatility provides an initial basis for moderately optimistic expectations about the state of the national economy.
More than half of that came from a rapid decrease in July’s services inflation, which came in at 3.1%. This drop is encouraging and indicates that services price pressures could be starting to ease. This sector has had an outsized influence on the recent trajectory of overall inflation. As shown in the chart below, goods inflation has soared. The rate of price increases is tepid, suggesting that prices are indeed going up, but the rate of increase is more moderate.
Our final indicator is wage growth, which is moderating. For one, this bodes well for inflation. Higher labor costs won’t be pushing inflation up in the latter half of this year. A little respite on the wage growth front will go a long way toward ensuring inflation remains close to that 2% target. This will be crucial in the months ahead.
Even with these encouraging signs, analysts warn that threats to the inflation forecast are still significant. A recently negotiated US-EU trade deal has put the brakes on climate-related trade tensions. It has produced predictability and increased the likelihood of avoiding retaliatory actions that would increase import costs to the United States. A new optimism among analysts is taking over when it comes to the eurozone economy. They think it will face fewer difficult prospects than initially feared because trade tensions have not deepened.
Disinflationary pressures in the eurozone remain modest. Economists particularly point toward consistently moderate inflation rates as a sign that the region is indeed in a “good place” these days. Falling services inflation alongside stable core inflation is welcome news for the economy. At the same time, muted wage growth bolsters this picture of promising trends.
Inflation is not likely to decrease significantly below the 2%-target anytime soon. Doing so will free up leaders to focus on fostering long-term, sustainable growth rather than short-term inflationary pressures. This stability offers a solid basis for sequential recovery and continued economic development throughout the eurozone.