Euro area headline inflation increased to 3.3% in August from 2.9% in July, according to preliminary data from Eurostat, with the rise primarily attributed to higher energy prices linked to the conflict in the Middle East [1]. While the overall inflation rate was in line with economists' expectations, core inflation—which excludes energy, food, alcohol, and tobacco—unexpectedly declined from 2.5% in July to 2.4% in August [1].
Commerzbank’s Dr. Vincent Stamer noted that the renewed move above 3% for headline inflation moves it further away from the European Central Bank’s (ECB) 2% target and aligns with ECB staff projections that had factored in two interest rate hikes [1]. This development is seen as cementing the likelihood of another ECB rate hike in September, although further hikes are considered unlikely as inflation is projected to ease next year [1].
Looking ahead, Commerzbank expects that many businesses, especially in manufacturing and food production, will pass on higher energy costs in the coming months, with high natural gas prices likely to drive up costs in these sectors in the coming quarters [1]. As a result, the core inflation rate is anticipated to rise significantly over the course of the coming year [1].
Despite the current uptick, the expectation remains that inflation will fall again next year, in line with ECB projections, reducing the likelihood of additional rate hikes beyond September [1].
CONCLUSION
The jump in euro area inflation to 3.3% in August supports expectations for an ECB rate hike in September, though further tightening appears unlikely as inflation is forecast to ease next year. Market participants are likely to focus on the ECB’s September decision and subsequent inflation trends.