Euro zone inflation rose sharply in August, moving above 3% for the first time in three years as higher energy costs pushed prices higher and added pressure on the European Central Bank to raise interest rates again this month.
Inflation across the 21 countries using the euro increased to 3.3% in August from 2.9% in July, according to data from Eurostat. The rise was driven mainly by energy prices, with crude oil and natural gas becoming more expensive as refiners also increased their margins.
The increase comes as the war involving Iran continues to affect energy markets, raising concerns that prolonged disruption could keep inflation elevated across Europe.
Despite the headline increase, there were signs that broader price pressures remained under control. Core inflation, which excludes volatile food and energy prices, eased to 2.4% in August from 2.5% a month earlier.
Services inflation also slowed, falling to 3% from 3.3%. Services account for the largest share of the euro zone’s consumer price basket, making the decline an important factor for ECB policymakers assessing whether higher energy costs are spreading into the wider economy.
The latest figures are broadly in line with the ECB’s expectations and are unlikely to change expectations of another interest rate increase at the bank’s September 10 meeting. The ECB is widely expected to raise its deposit rate to 2.50%, following its previous increase in June.
Financial markets have already largely priced in the September move, meaning investors are expected to focus more closely on what happens after the meeting.
ECB policymakers have so far shown little appetite for signalling further increases. Economists also expect the central bank could pause after September, with interest rates reaching a level that is viewed by many as broadly neutral for economic growth.
A relatively soft labour market and limited evidence of stronger wage growth could support a pause. Euro zone economic growth is also running at around 1%, leaving policymakers concerned that further tightening could weaken an already fragile economy.
However, financial markets are pricing in the possibility of two additional rate increases over the coming year. Investors are concerned that sustained increases in oil and gas prices could eventually push up costs across other parts of the economy.
The continued conflict involving Iran is adding to that uncertainty, particularly as natural gas prices remain under pressure. Some economists argue that the euro zone economy has proved more resilient than expected despite the effects of wars, tariffs and previous interest rate increases.
If further rate rises become necessary, the ECB may still move cautiously. Policymakers could skip the October meeting and wait until December, when updated economic forecasts are expected to provide a clearer picture of inflation and growth.
