Unprocessed food inflation eased to 3.2% in July after averaging 6.75% in the previous three months. Those months were marked by strong demand (supermarkets were among the few essential shops open during the lockdowns) and reduced supply due to seasonal labor shortages. Softer energy deflation, which eased to 8.3% in July from 9.3% a month earlier, only partially offset this large drop in food inflation and limited the upside of headline inflation despite a solid rise in core inflation.
In core terms, inflation rose to 1.2% in July from 0.8% in June, returning to the same rate as in February on the back of the strongest inflation rate for non-energy industrial goods since April 2002 at 1.7%. With no further breakdown at this stage, it is hard to speculate on what drove this sharp rise in manufactured goods' inflation from 0.2% in June and an average of 0.3% in the previous eight years. However, it may have to do with higher prices for clothes and footwear or furniture and appliances, which are the types of goods households consumed the most post-lockdown.
On a negative side, services inflation eased from 1.2% in June to 0.9% in July, the lowest mark since April 2016, when overall headline inflation was negative. This was perhaps partly due to heavy discounts on airfares and holiday packages.
With inflation's composition still evolving alongside households' demand after the lockdowns, finding a clear path for inflation ahead is a challenge. However, we believe that it will continue to creep up over the next year, with help from normalizing economic activity, while remaining below the ECB's target and requiring accommodative monetary policy for a long time.