Energy price pressures pushed eurozone inflation back above 3% in August, raising concerns that businesses already facing higher costs could soon experience additional pressure from rising interest rates.
Headline inflation in the euro area, which relies heavily on imported energy, increased to 3.3% from 2.9% in July, reaching its highest level since September 2024, according to a preliminary estimate released by Eurostat. Energy inflation accelerated sharply to 14.3%, up from 10.3% the previous month.
However, core inflation, which excludes volatile categories such as energy, food, alcohol, and tobacco, eased slightly to 2.4% from 2.5%.
The ongoing conflict in Iran and disruptions around the Strait of Hormuz have pushed up crude oil and refined product prices, while Europe has been particularly affected by instability in the natural gas market.
ECB Faces Pressure to Raise Interest Rates
Markets have largely maintained expectations that the European Central Bank will raise interest rates at its September 10 meeting. According to LSEG data, traders are pricing in a 98.9% probability of a 25-basis-point increase, which would bring the policy rate to 2.5%.
The ECB increased its key interest rate to 2.25% in June, marking its first rate hike since 2023, as policymakers responded to renewed global inflation pressures linked to the Iran conflict.
The central bank will be closely monitoring whether short-term inflation pressures become more persistent and begin influencing wages and services inflation, according to Joe Nellis, head of economic research at MHA.
“The ECB faces a dilemma: a trade-off between higher interest rates and economic costs. Higher borrowing costs will continue to pressure heavily indebted households, weaken housing markets, and make business investment more expensive.”
“For small and medium-sized enterprises in particular, another increase in financing costs could mean investment plans are postponed indefinitely or abandoned altogether.”
