Euro zone year-on-year inflation slowed unexpectedly in July, the first official estimate showed on Friday, casting new doubt on whether the European Central Bank will raise interest rates again this year. The European Union's statistics office Eurostat estimated that consumer prices in the 17 countries using the euro grew 2.5 percent year-on-year in July, after increasing 2.7 percent in June.
The Eurostat estimate does not provide monthly price growth data or any breakdown of the numbers. Economists polled by Reuters had expected inflation of 2.7 percent in July. "The positive inflation reading gives the ECB more room for manoeuvre given signs of a sharper than expected slowdown in economic growth and heightened risks related to sovereign debt on both sides of the Atlantic," said Nick Kounis, economist at ABN Amro.
"Essentially, a more favourable inflation evolution could make it easier for the ECB to take a break from rate hikes if the downside risks to the outlook were to intensify," he said. The ECB, which raised interest rates earlier this month for the second time this year, wants to keep inflation at below, but close to 2 percent.
The lower eurozone reading came as a surprise after inflation in Germany, the eurozone's biggest economy, hit a three-month high of 2.4 percent year-on-year this month after an unexpectedly strong upward push from oil prices. "Eurostat's methodology for seasonal factors has changed from January, widening the scope of the items subject to seasonal swings. This, we believe, is the main cause underlying the sharp slowdown in HICP inflation," said Luigi Speranza, economist at BNP Paribas.
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