European zone inflation rose unexpectedly in July, based on data released on Wednesday, although a measure of price growth in the services sector eased.
Wednesday's figures did not appear to upset market expectations for an interest rate cut by the European Central Bank (ECB) in September, but market concerns are likely to increase over the ECB's efforts to lower inflation.
Price growth in the 20 countries that use the euro rose to 2.6% in July from 2.5% in June based on Eurostat's preliminary estimate.
A key measure of underlying price growth that excludes energy, food, alcohol and tobacco failed to show the expected decline and remained unchanged at 2.9%.
"It's a tough number for the ECB," said Fabio Balboni, an economist at HSBC. "The decline in inflation in the goods sector is almost over and service inflation remains high."
Nevertheless, Balboni stuck to his forecast for ECB interest rate cuts in September and December, as did investors in the eurozone money market, with expectations that inflation would eventually ease.
Euro zone inflation has fallen sharply since reaching double digits in late 2022, when it was driven largely by a faster-than-expected opening of the economy after the COVID-19 pandemic and more expensive fuel following Russia's invasion of Ukraine.
However, that progress has stalled in recent months as prices in the services sector have been boosted by higher wage increases.
In the meantime there were positive signs for the ECB, growth in services prices slowed to 4.0% from 4.1% in June as the expected boost from the Olympics in Paris did not materialise, with some consumers unhappy with what they saw as prices too tall.
The ECB has made it clear that it will not rely on one data alone and will focus on the broader trend for inflation, which is expected to hover around current levels this year before returning towards the 2% target in 2025.
The central bank began cutting rates last month, stopped in July and is widely expected to slowly ease some of the sharpest hikes in its 25-year history over the next 1-1/2 years.
