Eurozone inflation hits 3.3% ahead of ECB rate decision

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Eurozone inflation rises

Highlights

Eurozone inflation rose to 3.3% in August.
Energy inflation accelerated sharply to 14.3%.
Core inflation eased slightly to 2.4%.
Markets expect another ECB rate increase.

Annual inflation rose to 3.3% in August from 2.9% in July, the highest since September 2024, based on Eurostat’s preliminary estimate. Energy prices were the main driver, rising 14.3% from a year earlier, compared with 10.3% in July, CNBC reported.

Energy pushes headline inflation higher

The latest figures underline Europe’s exposure to renewed disruption in global energy markets. The conflict involving Iran and restrictions on shipping through the Strait of Hormuz have rising crude and refined-product prices, while disruptions in natural gas markets have added pressure closer to home.

Other components of inflation remained considerably weaker. Services inflation slowed to 3.0% from 3.3%, while non-energy industrial goods accelerated modestly to 1.2% from 0.9%. Inflation for food, alcohol, and tobacco held at 1.2%.

Core inflation, which strips out volatile energy, food, alcohol, and tobacco prices, eased to 2.4% from 2.5%. That divergence leaves policymakers facing an inflation shock concentrated largely in energy rather than a broad acceleration across the economy.

Markets price in another ECB hike

Investors responded by reinforcing expectations that the ECB will tighten policy at its Sept. 10 meeting. Market pricing implied a 98.9% probability of a 25-basis-point increase, which would take the relevant policy rate to 2.5%, based on LSEG data.

The ECB already raised its key rate to 2.25% in June, its first increase since 2023, as policymakers responded to inflation pressures intensified by the Middle East conflict.

The central question is whether higher energy costs remain temporary or begin feeding into wages, services, and broader pricing decisions. The decline in core inflation offers some reassurance, but headline inflation moving further above the ECB’s 2% target increases the risk of persistent price pressure.

Higher rates deepen the economic trade-off

Another rate increase would make the inflation fight more costly for the wider economy. Higher borrowing costs can weaken housing demand, raise debt-servicing expenses, and make new investment less attractive, particularly for smaller companies dependent on external financing.

With inflation at 3.3% and energy prices rising at 14.3%, the ECB has limited room to ignore the latest shock. Yet tightening policy against an energy-driven increase also risks weakening growth without directly addressing the supply disruption responsible for much of the price pressure.

Earlier, we reported that Japanese bond yields climb to 30-year highs as rate expectations rise.

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