EZ CPI: Boosted by Energy Prices

Figure 1: Headline and Core EZ HICP Yr/Yr (%)

Source: Datastream/CE

The July provisional CPI provided no major surprise with the headline 2.9% Yr/Yr figure boosted by energy prices, but core at 2.5% and CPI ex energy unchanged at 2.2% Yr/Yr.  Service inflation edged up from 3.2% to 3.3%, but we feel that EZ wage trend should still mean a softer trend into 2027.  We see no signs of 2nd round effects. The key for CPI remains the Straits of Hormuz shipping and the impact on energy prices and parts of inflation.  While tensions remain high, we feel that Trump wants lower gasoline prices and this requires further compromise to get a new ceasefire.  We maintain the forecast of WTI at USD80 end 2026 and USD70 end 2027.  

It is also worth noting that the ECB Q1 negotiated wage settlements out to Q1 2027 at 2.7% are little changed from the last set of figures and do not suggest that the Iran war energy price shock is leading to higher wage settlements.  Indeed, at this level of negotiated wage settlements, wage trends are consistent with a 2% inflation target being achieved into 2027 and assuming that energy prices come down somewhat – which is still our baseline.  Meanwhile, the underlying trend in GDP is also consistent with the ECB inflation target.  Though the flash Q2 data increased by 0.4%, it was due to Ireland volatility again (up 3.9% on the quarter).  Germany, France and Italy at 0.2% painted a more restrained picture, though Spain performed well again at 0.7%.  Thursday’s July EZ economic sentiment figures at 96 are also consistent with modest growth momentum and no major pick-up or slowdown. For the ECB the data is not enough in our view to swing the outcome of the September meeting yet after our assessment of a 50% probability of September 10 hike (here).