Euro Inflation Preview: Energy U-turn

Research evidence excerpt

Euro Inflation Preview: Energy U-turn

IdeaM

Headline Up, Core Stable

Our EA July inflation forecasts | Headline up to 2.9%Y and core stable at 2.4%Y: July

could bring a slight uptick of headline (2.9%Y) and stable core (2.4%Y) inflation. We

expect Energy inflation to move up (10.1%Y from 8.5%Y), reflecting higher fuel prices,

especially from the phase-out of the German tax cut, but also some strengthening from

the recent oil price uptick. Natural gas prices may also move up on the back of lagged

indexation adjustments in France, while the wholesale price rise from July will likely take

longer to affect retail prices. Food inflation could soften further (1.4%Y from 1.5%Y) as we

see more disinflation in the pipeline before the energy price push lifts inflation at the end

of the year. We expect Services inflation to rise to 3.3%Y from 3.2%Y, reflecting some

strengthening in inflation of volatile tourism-related items, but underlying services

inflation is likely to remain stable at 3.2%Y, where it has been hovering since January. We

forecast goods inflation up (0.8%Y). Similar to food, we expect the energy impact to only

feed through later in the year but inflation in IT-related items should continue to push

higher. Together, this would keep core inflation unchanged at 2.4%Y (+5bp unrounded).

Lastly, while we usually wait for the flash release to update our full inflation forecasts for

2026-27, today we provide a revised path taking on board higher oil and natural gas prices

(averaging futures from the past 10 working days). On average, we now see headline

inflation at 2.8%Y in 2026 and 2.3%Y in 2027 (vs 2.6%Y and 1.9%Y previously). Headline

would start 2027 largely above 2% but undershoot at the end of the year.

Exhibit 2: Headline inflation up and core stable in July