08:58 AM EDT, 07/30/2024 (MT Newswires) -- Tuesday's flash estimate of German inflation in July shows that there is still some way to go before it's back to the European Central Bank's (ECB) target of 2%, said ING.

Headline inflation came in at 2.3% year-on-year, slightly up from 2.2% y/y in June. The European inflation measure came in at 2.6% y/y from 2.5% in June.

Tuesday's German inflation data not only illustrates the ongoing impact of base effects and earlier government measures on present inflation but also highlights that inflation remains sticky above 2%, wrote the bank in a note to clients.

Judging from available regional state data, services inflation remained close to 4% y/y. While hotel and restaurant prices came down somewhat, leisure costs and clothing price inflation went up. Monthly changes show actual price drops in clothing as a result of summer sales and hospitality services, as companies probably reversed some of the price markups from the Euro2024 soccer games.

Looking ahead, the stickiness of inflation at slightly too high a level looks set to continue as favorable energy base effects are petering out while, at the same time, wages are increasing, stated ING. Leading indicators like selling price expectations don't give real guidance currently but very recently re-accelerated and remain slightly above the historical average in services and below the historical average in manufacturing.

In any case, with new high wage demands, it's hard to see German wage growth coming down in the second half of the year, pointed out the bank.

As a result, ING continues to expect inflation to hover within the broader range of between 2% and 3% rather than returning in a straight line to 2%.

For the ECB, Tuesday's data releases haven't made things any easier, added the bank. In fact, in terms of growth, the divergence has widened, with Germany falling behind while countries such as France and Spain are enjoying a decent recovery.

While German data is stagflationary, the eurozone as a whole provides a picture of a relatively solid but potentially fading recovery with sticky inflation, according to ING. It is this stickiness of inflation that will strengthen the doubts around another rate cut at the September meeting. The ECB will have six more weeks to chew on the question of a possible cut to tackle the fading recovery or stay on hold to further fight inflation.