August inflation hits highest level in three years, putting fresh pressure on ECB to raise interest rates….
Eurozone inflation accelerated sharply in August, reaching 3.3 per cent its highest level in three years as the conflict in the Middle East pushed energy prices higher across the bloc.
The latest figure from the European Union’s statistical agency, Eurostat, represents a significant increase from the 2.9 per cent recorded in July and comes in line with analysts’ expectations. It is also well above the European Central Bank’s two-per-cent inflation target, adding to pressure on the bank to tighten monetary policy further.
Energy was the biggest driver of the increase. Eurostat estimates that energy prices rose by 14.3 per cent year-on-year in August, compared with a 10.3 per cent increase in July.
The surge has been closely linked to the war involving the United States and Iran and the near-total disruption of shipping through the Strait of Hormuz, one of the world’s most important routes for the transportation of oil and gas.
The resulting increase in global energy costs is now feeding into the wider eurozone economy, with economists warning that inflation could remain above the ECB’s target well into next year.
Leo Barincou of Oxford Economics says higher gas and food prices are likely to keep adding upward pressure to consumer prices in the months ahead.
With inflation accelerating, financial markets are increasingly expecting the ECB to raise interest rates again when policymakers meet on September 10, following the bank’s first rate increase in June.
Moody’s Analytics economist Kamil Kovar says another hike is likely next week, although uncertainty remains over whether policymakers would follow it with another increase in December.
He points to the broad-based rise in energy costs extending beyond transport fuel to gas and electricity as a factor strengthening the case for the ECB’s more hawkish policymakers.
Despite the headline increase, underlying price pressures have shown some signs of easing. Core inflation, which excludes volatile energy and food prices, fell to 2.4 per cent in August, from 2.5 per cent in July.
Inflation for food, alcohol and tobacco remained unchanged at 1.2 per cent, matching July’s figure.
The August reading marks the first time eurozone inflation has climbed this high since September 2023, when it stood at 4.3 per cent.
That period came as inflation was gradually retreating from its record 10.6 per cent peak in October 2022, following a dramatic surge in energy costs triggered by Russia’s invasion of Ukraine.
Now, nearly three years later, another geopolitical conflict is once again putting energy prices at the centre of Europe’s inflation challenge — and forcing the ECB to weigh the need to contain rising prices against the wider economic impact of higher borrowing costs.
