Eurozone inflation drops in July as economic growth accelerates

Europe’s economy is showing positive signs of resilience, according to data published Monday by Eurostat, the EU statistical office.

Inflation in the eurozone dropped to 5.3% in July, down from 5.5% in the previous month. This is the lowest level of inflation registered since January 2022, before the Russian invasion of Ukraine gave rise to prolonged economic uncertainty.

But core inflation, which provides a more accurate estimate of underlying price pressures, remained unchanged from June at 5.5%. 

Annual inflation for food, alcohol and tobacco slowed down to 10.8% compared with 11.6% in June, while energy and industrial goods also saw prices fall. Services, however, saw inflation grow slightly to 5.6%, up from 5.4% in June.

Some countries continue to see alarmingly high inflation rates. Of the 20 countries in the euro area, inflation last month was highest in Slovakia (10.2%), followed by Croatia (8.1%) and Lithuania (7.1%). 

The drop in overall inflation is in line with previous economic forecasts but remains well above the 2% target of the European Central Bank (ECB).

Last week, the ECB increased interest rates for the ninth consecutive time to their highest levels in 23 years, in a bid to bring inflation under control. 

Underlying inflation still high

But the data for core inflation does not give confidence that the interest rate hikes are having their desired impact.

ECB chief Christine Lagarde has repeatedly said interest rates will continue to rise until the underlying pressures on consumer prices show signs of decline.

Growth exceeds expectations

Meanwhile, Eurostat also revealed Monday that the eurozone’s economy grew by 0.3% in the second quarter of GDP, more than was previously projected. GDP was up 0.6% compared to the same period last year.

GDP in the 27-member EU bloc remained stable.

Within the euro area, Ireland (+3.3%) recorded the highest quarter-on-quarter increase, followed by Lithuania (+2.8%). But some economies registered negative growth, including Sweden (-1.5%), Latvia (-0.6%), Austria (-0.4%) and Italy (-0.3%). 

Germany, considered the union’s economic powerhouse, appears to be slowly coming out of its recession, eking out 0.0% growth.

This comes following months of stagnant GDP across the euro area, with high borrowing costs suffocating growth.

The figures released today will boost hopes that the eurozone could achieve the ECB’s forecast of 0.9% growth for the eurozone this year, with major economies such as France (+0.5%) and Spain (+0.4%) also recording encouraging growth patterns compared to the previous quarter.