Preliminary data released on July 31 showed headline annual inflation in the euro area reaching 2.9% in July, up from 2.8% in June and in line with market expectations of 2.9%.

Core inflation, which excludes volatile food and energy costs, also moved higher—rising to 2.5% year-over-year, above both the 2.4% expected by economists and the 2.4% recorded in June. This increase in underlying price pressures suggests that inflationary trends extend beyond energy costs alone. Services inflation, in particular, is closely watched by ECB policymakers as a gauge of domestic demand-driven price growth, and its continued elevation signals that wage growth and household spending remain sources of upward pressure.

July inflation breakdown:

• Food price inflation: +1.2% (vs. +1.5% prior)
• Energy price inflation: +10.0% (vs. +8.5% prior)
• Services inflation: +3.3% (vs. +3.2% prior)

On a monthly basis, energy prices surged 2.4% and service prices rose 1.1%, while food prices remained flat.

The European Central Bank targets inflation at 2.0% over the medium term. Both headline and core readings for July remain meaningfully above that threshold, indicating that price pressures persist across multiple segments of the euro area economy. The ECB has been in an extended tightening cycle aimed at bringing inflation back to that target, and the latest figures complicate the case for any near-term pause.

The data adds to the case that the ECB cannot ease its stance when policymakers reconvene after the summer break. Should August data show a similar trend, market participants widely anticipate another interest rate increase at the ECB's September meeting.

Reflecting those expectations, traders were pricing approximately 66% odds of a rate hike in September as of the latest data, a modest increase from roughly 64% earlier in the week. By year-end, markets were pricing in around 38 basis points of additional tightening, with approximately 52 basis points of rate hikes priced in before mid-2027.