Eurozone inflation rises in August and adds pressure on ECB for another rate hike

Eurozone inflation jumped to 3.3% in August (the highest since September 2023) from 2.9% in July, as renewed tensions in the Middle East lifted energy costs and increased upward pressure on prices.

Although core inflation, excluding volatile food and energy components, ticked down from 2.5% previous month to 2.4% in August, economists warn that fresh waves of negative impact from geopolitical factor could be seen in coming months.

Higher inflation contributes to existing signals to the ECB policymakers for further monetary policy tightening, with high market expectations that the European Central Bank would opt for another 25 basis points hike in its policy meeting on September 10.

But ECB policymakers are unlikely to signal any further rate hikes and economists also see a high probability the ECB will stop the tightening cycle after September’s hike, assuming that current gentle policy adjustments may be enough to keep price pressures under control.

Such scenario could be supported by softer labor market, no significant rise in wage growth, as well as weak economic growth with risk of slowing further, if geopolitical crisis deepens.