Euro area flash HICP was slightly up in July. We stick our view of an ECB rate cut in September

Euro area inflation was up and slightly surprised to the upside in July to 2.6% from 2.5% in June (consensus: 2.5%) according to Eurostat flash estimate. Services inflation are slightly down to 4. 0 % Y/Y from 4. 1 % as food (inc. alcohol and tobacco) inflation, to 2.3% Y/Y from 2.4%. Energy prices picked up to 1.3% Y/Y, compared with 0.2% in June and non-energy industrial goods slightly increased to 0.8%, compared with 0.7% in June). Core inflation remained stable at 2.9% Y/Y. By country, inflation surprised to the upside in Germany and in Italy, while it surprised to the downside in France and Spain: German HICP was up and surprised to the upside in July at +2.6% Y/Y after +2.5% in June (consensus: +2. 5 %). Core CPI inflation came out at 2.9% Y/Y, as in June. Services CPI inflation was stable at 3.9% Y/Y for the third month in a row. French HICP rose by 2.6% Y/Y in July 2024 , below consensus expectations ( consensus: 2.8% and vs. 2.5% for our own forecast ) , after +2.5% Y/Y in June (+0.2% M/M, as in June). Inflation was fueled by a sharp increase in energy prices, particularly those of gas due to the increase in the gas distribution tariff . The most welcome news is the fall in services CPI inflation which came out at 2.5% Y/Y in July after 2.9% in June , lowest since March 2022. Food prices continue to slow down to 0.5% Y/Y vs. 0.8% in June and 12.7% a year earlier. Prices of manufactured products are stable, as in June. In Italy July inflation reached 1.7% Y/Y from 0.9% previously due to the acceleration of regulated energy tariffs and a less pronounced deceleration of non-regulated energy prices . Without all the details, Istat has also indicated that good prices (national definition) have rebounded from negative territory while service prices have slightly accelerated. The acceleration of inflation in July is slightly above our expectations and that of the consensus. In July, Spanish inflation decelerated significantly to 2.9% Y/Y from 3.6%, which is below consensus expectations (3.2%). According to the national statistical office the decline is due to a larger decrease of electricity prices than a year ago, a decline in food prices compared to an increase in July 2023 and to a smaller increase of entertainment and cultural services prices compared to 12 months ago. Regarding the ECB, we stick our view of a September rate cut as the upside surprise was mainly driven by energy prices . We expect another rate cut in December and 4 more cuts next year, implying a terminal rate of 2.25%.