• Eurozone inflation rose to 2.9% in July, up from 2.8%, driven by higher energy costs amid renewed US-Iran tensions.
  • Core and services inflation also accelerated, signaling broader price pressures beyond energy.
  • Markets now focus on a potential ECB rate hike in September, with the economy showing resilience.

Inflation Ticks Up

Eurozone annual inflation accelerated to 2.9% in July, up from 2.8% in June, according to Eurostat's flash reading released on Friday. The uptick, which matched economists' forecasts, was largely driven by energy costs, which surged following renewed tensions between the US and Iran. This development reinforces expectations that the European Central Bank (ECB) will raise interest rates again, with markets and analysts now eyeing a possible move at the September meeting.

"The rebound in energy prices is a stark reminder that inflation is not yet vanquished," said one economist. "The ECB's path forward is increasingly clear: another hike is coming, and September is the likely timing."

Broader Price Pressures

The acceleration was not confined to energy. Core inflation, which excludes volatile food and energy prices, also ticked up, as did services inflation. This broadening of price pressures suggests that underlying inflationary dynamics remain robust, even as the economy shows resilience.

According to Eurostat, core inflation rose to 5.5% from 5.4% in June, while services inflation climbed to 5.2% from 5.1%. These figures underscore the challenge facing the ECB, which has been battling to bring inflation back to its 2% target.

"The acceleration in core and services inflation is particularly concerning," noted a strategist at a major investment bank. "It indicates that the inflation problem is not just about energy, but is becoming more entrenched."

Market Expectations Shift

In response to the data, money markets have increasingly priced in another ECB rate hike, with a September move now seen as highly likely. The central bank has already raised rates multiple times since last year, but this latest reading suggests more tightening may be needed.

The eurozone economy, meanwhile, continues to show resilient growth, defying earlier fears of a recession. This combination of sticky inflation and solid growth gives the ECB room to act without unduly hurting the economy.

"The economy is holding up well, which allows the ECB to focus on its primary mandate of price stability," said an ECB watcher. "A September hike is now largely baked in, unless we see a dramatic change in the data."

Looking Ahead

The ECB's Governing Council is scheduled to meet in September, and policymakers will have access to a fresh set of economic projections. With inflation on the rise again, the case for a rate hike is compelling, but the central bank will also weigh the risks to growth.

For now, investors and businesses are bracing for higher borrowing costs, as the ECB continues its fight against inflation. As one market participant put it, "The ECB is not done, and the data today confirms that further action is necessary."

A spokesperson for the ECB declined to comment on the inflation data, noting that the central bank's decisions are made by the Governing Council.