2.7 per cent in July: Why inflation will rise again soon

Spain leads the eurozone in economic growth, according to preliminary data released by Eurostat on Thursday. The region’s gross domestic product (GDP) rose by 0.4 percent in the second quarter of the year, marking a recovery despite the ongoing effects of the Iran conflict earlier this spring. Spain emerged as the fastest-growing major economy within the eurozone, with its GDP increasing by 0.7 percent compared to the previous quarter. Meanwhile, Austria's economic output remained stable, according to the Austrian Institute for Economic Research (WIFO), which noted that rising oil prices due to the Iran conflict had disrupted the country’s modest recovery. The improvement in the eurozone’s business climate has been evident since early July, with the composite index climbing to 96.9 points, an increase of 1.5 points, according to data from the European Commission. Economists had anticipated a rise of just 0.5 points. Consumer confidence also showed slight improvement, though the final figures for July placed the index at minus 15.9 points, still relatively low. A key factor behind the subdued consumer sentiment is the inflationary pressure driven by the Iran conflict, particularly the sharp increase in energy costs, which have affected both businesses and households alike. The European Central Bank (ECB) has expressed caution regarding the outlook for economic activity, citing concerns over the impact of the energy crisis and related uncertainties. While the ECB has kept interest rates unchanged, financial markets anticipate further rate hikes, possibly as early as September, given the persistent threat of inflation. This follows the June rate increase, which was part of a broader effort to curb rising prices. In Austria, the WIFO’s rapid estimate indicates that economic performance stagnated during the second quarter. The institute attributed this to the sharp rise in oil prices, which interrupted the previously observed recovery. According to WIFO, real GDP growth in the second quarter remained roughly flat compared to the previous quarter. Industrial production was weak, while construction saw a decline in value added. However, there were small gains in trade, transport, accommodation, and catering sectors. Real GDP had grown by 0.2 percent in each of the last two quarters before the current slowdown. Marcus Scheiblecker, a WIFO economist, stated that the results were consistent with expectations based on the Iran conflict and the surge in oil prices. For the full year, the institute expects continued economic expansion in Austria, projecting growth of 0.9 percent. “We currently see no reason to change our forecast,” Scheiblecker told the APA. The WIFO also noted that growth in the fourth quarter of 2025 and the first quarter of 2026 had been modest, at 0.2 percent each. Meanwhile, inflation in Austria eased slightly in July, dropping to 2.7 percent from 3.2 percent in June. The decrease was largely due to lower food prices, which were influenced by a reduction in the VAT on basic food items from 10 percent to 4.9 percent effective July 1, 2026. Manuela Lenk, head of statistical office Austria, cited the tax cut as a key contributor to the price drop. Food, tobacco, and alcohol prices fell by 0.1 percent in July, following a 1.5 percent increase in June. Services remained the main driver of inflation, with prices rising sharply in areas such as hospitality and transportation. Economist Josef Baumgartner of WIFO estimated that the VAT cut reduced overall inflation by 0.15 percentage points. He also noted that producer price inflation had moderated in recent months. Despite the easing, energy prices continued to climb, with annual increases reaching 5.7 percent. Service sector prices, including dining and lodging, rose by 4.4 percent, reflecting higher costs for utilities, rent, and other fees. Austrian inflation remains below the eurozone average, which stood at 2.9 percent. Germany’s projected inflation for July was 2.8 percent, slightly above Austria’s. However, experts warn that the downward trend may be temporary. Baumgartner pointed out that rising transport and fertilizer costs due to the Iran conflict will soon affect consumers. Additionally, drought conditions could lead to lower crop yields, further pushing up food prices. He anticipates that food prices could rise by up to 3 percent by year-end, exceeding 2 percent even if the situation stabilizes. Energy price increases, primarily driven by high fuel and heating oil costs, are expected to become more pronounced in the fall. With new contracts coming into effect, these higher prices will likely translate directly into household bills. Baumgartner described the impact of the fuel price cap on inflation as “very limited.” Rising wages in the hospitality industry, due to labor shortages, are also contributing to service cost inflation. Higher fees for travel documents and train tickets add to the upward pressure on service prices. For industrial goods, which include clothing, electronics, and cosmetics, inflation remained relatively low at 0.8 percent. However, increased transportation costs caused by blocked shipping routes in the Red Sea are expected to push prices higher in the near future. These additional costs, stemming from the Iran conflict, will eventually be passed on to consumers, further affecting inflation. Looking ahead, the WIFO forecasts an annual inflation rate of 3.2 percent for the year. While Baumgartner does not expect a revision to the projection, he acknowledged that the blockage of additional shipping routes in the Red Sea has worsened the situation. If a peaceful resolution emerges, oil prices could drop significantly, potentially altering the inflation outlook.