Euro area inflation held steady at 2.0 percent in July 2025, unchanged from June but notably lower than the 2.6 percent recorded a year earlier, reflecting a gradual easing in price pressures. Over the month, however, there were no changes in the inflation numbers within the zone, reflecting stability.

Services remained the dominant driver, adding 1.46 percentage points to the headline rate, underlining persistent cost pressures in labour-intensive sectors. Food, alcohol and tobacco contributed a further 0.63 points, showing that households continue to face elevated grocery bills. Non-energy industrial goods added 0.18 points, indicating moderate price gains in manufactured items. By contrast, energy exerted a negative contribution (minus 0.23 points), reflecting lower fuel and utility costs that helped offset upward pressure elsewhere.

Beneath the stability, inflation dynamics varied across member states: eight countries saw declines, six held steady, while thirteen experienced an uptick, signalling uneven progress in price stability across the bloc. Across the top four economies in the area, inflation fell in Germany (1.8 percent after 2.0 percent) and Italy (1.7 percent after 1.8 percent), but rose in Spain (2.7 percent after 2.3 percent), while it remained constant in France (0.9 percent after 0.9 percent) on an annual basis.

As a result, the overall picture suggests that while headline inflation has returned to the European Central Bank's 2 percent target, the composition points to stubborn service-sector inflation. This latest update takes the RPI to minus 22 and the RPI-P to minus 34. This means that economic activities are now well behind the expectations of the euro area economy.

Forecasters expect no revision in HICP from the flash at 2.0 percent and 2.3 percent for narrow core.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.