Eurozone inflation is a mixed bag

Eurozone flash inflation has been a mixed bag today. Headline HICP inflation increased to +2.2% in July, up from +1.9% in June and this was ahead of the +2.0% estimate. Coming in the wake of a positive German inflation surprise yesterday, the shock factor of this data may have been tempered slightly.

It is clear from the table below that the bulk of this comes from the Energy component which has increased by over 14% year on year. However, when considering core inflation which strips out energy, food, alcohol and tobacco, the core HICP only increase by +0.7%. This was down from +0.9% in Jun and lower than the +0.8% that had been forecast.


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Core inflation is just not being generated in the Eurozone. Once the base effects of the huge declines in 2020 energy price rises which have subsequently recovered in 2021 run through, the headline HICP will fall back decisively too.

Eurozone GDP beats expectations whilst Unemployment falls

Elsewhere there was much better economic data, with Eurozone GDP rising much higher than forecast in Q2. The reading of +2.0% was much higher than the +1.5% forecast by consensus and decisively puts an end to a technical recession after two consecutive quarters of decline.


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There was also a lower than expected unemployment rate of 7.7% (down from a revised 8.0%) which also beat expectations of 7.9%.

Taking this data together, the inflation picture is the concern, as the ECB is not going to be able to tighten monetary policy without sustaining inflation around 2%. However, the growth picture is a welcome positive surprise and given the US GDP disappointment, yesterday may help to bolster growing recent support for EUR against USD.

Initial Market Reaction

A mixed reaction but mildly EUR supportive.

  • EUR/USD c. +5 pips
  • 10 year Bund yield limited reaction
  • DAX +5 ticks