Inflation across the eurozone remained unchanged in July, staying at an annual rate of 2.0% - exactly in line with the European Central Bank’s inflation target. The figure, released in preliminary estimates by Eurostat, came as a mild surprise to economists who had forecast a slight drop to 1.9%. The data, reported by the Wall Street Journal, is likely to influence expectations around the ECB’s next steps, particularly its upcoming policy meeting in September.

The latest inflation figure strengthens the case for the ECB to maintain its current interest rate, which stands at 2.0%. Inflation across the bloc has now been at or below the ECB’s 2% goal since May. Internal forecasts from ECB staff project inflation will dip to an average of 1.6% in 2026, but rise again to the 2% mark the following year.

At the central bank’s last policy meeting, ECB President Christine Lagarde emphasized that policymakers were comfortable with the current inflation trajectory. She also noted that small deviations from the target were expected and would not prompt immediate policy action, particularly in a context where inflation is expected to stabilize over the medium term.

The stable price environment coincided with an unexpectedly strong economic showing in the second quarter. Contrary to expectations of a slight contraction, eurozone economic activity improved, surprising many analysts. This economic resilience has become a central factor in revised forecasts from institutions such as Barclays, which no longer anticipate an interest rate cut in September.

The outlook for growth had been clouded earlier this year when U.S. President Donald Trump introduced new tariffs in the spring, sparking concerns that the resulting trade friction would weigh on Europe’s export-driven economy. However, these concerns were partially offset by a surge in orders from U.S. firms stockpiling goods ahead of the anticipated restrictions. That early-year boost helped cushion any immediate negative impact from the tariffs.

The ECB’s decision last week to leave interest rates unchanged marked a shift from its earlier course. Since June 2024, the bank had enacted eight consecutive rate cuts, moving away from the aggressive tightening cycle that began in response to post-pandemic inflation and the energy price shocks triggered by Russia’s full-scale invasion of Ukraine.

Some economists are now focusing on signs of cooling inflation within specific sectors. Dirk Schumacher, chief economist at German development bank KfW, pointed to a decline in services inflation in July as an early indication of easing price pressures. He also noted that the recent resolution in the transatlantic trade dispute could play a role in shaping inflationary trends in the months ahead, depending on how it filters through global supply chains and pricing behavior.

The U.S. tariffs are expected to have complex ripple effects. On the one hand, demand for European products in the U.S. may remain firm, which would be supportive of eurozone growth. On the other hand, Chinese manufacturers facing barriers in the U.S. market may attempt to compensate by lowering prices in other markets, including Europe - potentially contributing to lower overall inflation within the bloc.

Another factor that could influence price developments is the euro’s recent strengthening. A stronger currency tends to lower the cost of imported goods, which in turn can reduce inflationary pressures. In light of this, François Villeroy de Galhau, governor of the French central bank, urged the ECB to remain open to the possibility of further rate reductions if warranted by the economic data.

The broader context of the EU-U.S. trade agreement, announced on Sunday, adds a layer of complexity. While the deal increases certain tariffs compared to earlier in the year, it also brings a degree of clarity and predictability that had been lacking during months of heightened trade tensions. This stability, analysts say, may improve business confidence and investment planning, ultimately bolstering the region’s economic resilience.