Euro zone inflation rose slightly in August, edging just above the European Central Bank’s (ECB) 2% target and reinforcing expectations that interest rates will remain unchanged in the near term.
Data released by Eurostat on Monday showed that consumer prices in the 20-nation currency bloc increased by 2.1% year-on-year, up from 2% in July. The reading was marginally higher than forecasts in a Reuters poll, which had projected no change. The increase was largely attributed to higher unprocessed food prices and a smaller drag from falling energy costs.
Core inflation, which excludes volatile food and fuel prices and is closely watched by policymakers, held steady at 2.3%, defying expectations of a slight decline to 2.2%.
The figures align with the ECB’s forecast that inflation will hover around its target through the end of 2025. Softer goods inflation and easing energy costs are being counterbalanced by persistent growth in food and services prices.
With price pressures largely contained, markets are betting that the central bank will keep interest rates steady for the rest of the year. Since mid-2024, the ECB has cut its key rates by two percentage points, and debate among policymakers now centers on whether additional easing might be warranted further out.
Concerns about inflation undershooting the target in 2026 could intensify those discussions. Analysts warn that a prolonged dip could risk entrenching low inflation, a scenario that dogged the euro zone in the decade before the pandemic.
ECB board member Isabel Schnabel, however, played down those concerns, arguing that risks were skewed towards higher inflation. She pointed to resilient economic growth and global trade disruptions that could lift costs.
“It is important to acknowledge that we cannot fine-tune inflation in a way that it is always at 2% in a shock-prone world,” Schnabel told Reuters. “We can tolerate moderate deviations of inflation from target in either direction.”
Still, some policymakers remain cautious and continue to float the possibility of further cuts to safeguard against a potential slowdown. Economists widely expect no change to the ECB’s 2% deposit rate at the next policy meeting on September 11, though opinions diverge beyond that point.
Some forecasters anticipate a potential “insurance” cut late this year or in early 2026 to signal that the bank will not tolerate a persistent undershoot of its inflation goal.
