German inflation rose in July, evidence that may add to the European Central Bank's (ECB) caution in further interest rate cuts.
Consumer prices rose 2.6% from a year earlier in July, up from 2.5% the previous month. Analysts interviewed predicted the rate would remain stable. Although energy costs decreased less than in June, food price pressure increased and services remained stable.
A separate report earlier showed Spanish inflation fell more than forecast. Readings for France, Italy, and the euro area will be announced on Wednesday, with Nowcast analysts and forecasters from Bloomberg Economics predicting a steady reading of 2.5% for the region.
Combined with a lopsided growth report showing an unexpected contraction in Germany, the inflation figures will provide information to ECB officials trying to determine whether the economy needs further reductions in borrowing costs. More data will be available for their next meeting in September, Governing Council member Boris Vujcic said on Tuesday.
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 main manufacturing sector.
The central bank is focusing heavily on domestic price pressures to determine whether the rapid rise in wages after a surge in inflation in recent years will translate into new cost pressures.
Executive Board member Isabel Schnabel said last week that officials are closely monitoring the services sector, where prices continue to rise more than twice the ECB's 2% goal.
Although Germany's statistics office does not publish a core measure that excludes the variable food and energy components, state-level data suggest that it fell to 3.1% from 3.3%, based on Bloomberg Economics.
Before their next meeting in September, ECB policymakers will have another month of inflation data and more information on wages and corporate profits.
Although policymakers have given little guidance on where lending rates are headed, investors and economists expect them to make two more cuts this year after their initial move in June. Market expectations on the policy path remained stable after the release of German inflation data.
