(Bloomberg) -- German inflation accelerated in July, evidence that may add to the European Central Bank’s caution as it moves toward further interest-rate cuts.
Consumer prices rose 2.6% from a year earlier in July, up from 2.5% the previous month. Analysts polled by Bloomberg had predicted the pace to remain stable. While energy costs eased less than in June, food price pressures increased and services remained stable.
A separate report earlier showed Spanish inflation slowing more than predicted. Readings for France, Italy and the euro area are due on Wednesday, with analysts and the Nowcast of Bloomberg Economics forecasting a stable reading of 2.5% for the region.
Combined with uneven growth reports showing an unexpected contraction in Germany, the inflation numbers will inform ECB officials trying to work out whether the economy needs another cut in borrowing costs. Much more data will be available for their next meeting in September, Governing Council member Boris Vujcic said on Tuesday.
The picture that emerged since this month’s rate decision is one of resilient growth in France, Spain and Italy, as well as weakness in the euro area’s biggest member state.
German output surprisingly shrank 0.1% in the second quarter, according to data released on Tuesday, after several indicators already pointed to a lack of momentum in the country’s key manufacturing sector.
Central bankers are particularly focused on domestic price pressures to determine whether rapid wage increases following the inflation spike of recent years will translate into new cost pressures.
Executive Board member Isabel Schnabel said last week that officials are closely watching the services sector, where prices have continued to rise at more than twice the ECB’s 2% goal.
While the German statistics office doesn’t publish a core measure that strips out volatile food and energy components, state-level data suggest that it eased to 3.1% from 3.3%, according to Bloomberg Economics.
Before the next meeting in September, ECB officials will have another month of inflation data and more information on salaries and corporate profits.
While policymakers have given little guidance where borrowing rates are headed, investors and economists expect them to deliver two more cuts this year following their initial move in June. Market bets on that path for policy held steady after the release of the German inflation data.
--With assistance from Joel Rinneby, Simon Lee, James Hirai, Andrej Sokol (Economist), Bastian Benrath-Wright, Marilen Martin and Alessandra Migliaccio.
(Updates with Nowcast in third paragraph)
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