According to statistics released by Eurostat on Friday, inflation in the euro area is continuing its downward trend, and it appears that the pressure on prices has peaked.
This reduces the burden on the European Central Bank, which is in the midst of the most rapid rate-hike cycle in its history, having just raised interest rates from record lows to their highest level in over two decades in order to counteract unprecedented inflation.
The next question is whether sufficient action has been taken to re-establish the 2% annual price hikes. July's 5.3% increase in consumer prices was below June's 5.5% increase and continued a pattern that began in the fall. That being said, the index, which does not factor in the cost of food and energy, has remained unchanged at 5.5%; this is the primary indicator that the ECB is keeping a close eye on.
The increase to 5.6% from 5.4% in service inflation is cause for concern because the cost of services is greatly affected by salaries and tends to be relatively steady.
Markets continue to anticipate another rate hike to 4% this year, though perhaps not in September, while the ECB's decision on rates is still unclear despite the encouraging reports.
Wage growth may be constrained if the labor market remains tight and the main pressure on pricing persists.
Markets anticipate price increases of over 2% per year for the foreseeable future as a result of this. It's possible that getting it down to 3 percent won't be too difficult, but getting through the last phase of disinflation will be difficult.
In spite of this, the pressure on prices should lessen as the economic situation worsens because growth is slowing, investment is down, and demand is still modest.
The decline in energy prices, the primary factor behind the earlier inflation spike, will eventually trickle down to consumers despite the delay.
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