Eurozone inflation rose for a third straight month in August, reinforcing expectations that the European Central Bank will raise its key interest rate next week for the second time since the outbreak of the war in Iran.
Inflation rose to 3.3% from 2.9% in July, the European Union's statistics agency Eurostat said Tuesday, matching consensus expectations from economists polled by The Wall Street Journal. That marked its highest level since September 2023.
Energy costs continue to propel inflation in the 21-nation currency area, having accelerated further in August after an escalation in hostilities in the Middle East drove a rebound in oil prices.
"With inflation still accelerating, the ECB is all but certain to hike at next week's meeting," said Leo Barincou, senior economist at Oxford Economics.
Inflation has remained above the bank's 2% target since March, just after the start of the war, and investors have almost fully priced in a rate increase on Sept. 9.
However, there are few signs those energy prices have spilled over into other items in the inflation basket or second-round effects such as calls for higher wages. Annual services inflation, which is particularly exposed to labor costs, fell to 3.0% in August, from 3.3% in July, Eurostat said.
"We think it is too early to pencil in a third hike, especially given that underlying price pressures remain contained for now," Barincou added.
Heatwaves in Europe since the spring have prompted concern over rising prices, too, given their impact on agriculture and on transport through drying rivers. However, food inflation held at 1.2% in August, the same as in July. Core inflation, which strips out food and energy prices, declined to 2.4% from 2.5%.
Still, in the coming months, business are likely to pass on higher energy prices, particularly in the manufacturing and food-production sectors, Commerzbank economist Vincent Stamer said in a note to clients.
"As a result, the core inflation rate is set to rise significantly over the course of the coming year," he said.