Eurozone Inflation Hits 3.3%, Highest in Three Years, Pushing ECB Toward Rate Hike

Inflation in the eurozone surged to 3.3% in August, up from 2.9% in July, reaching its highest level in nearly three years, according to a preliminary estimate from Eurostat, the European Union’s statistics office. The sharp rise strengthens the case for another interest rate increase by the European Central Bank (ECB), which meets next week to review monetary policy. Energy prices were the main driver, jumping 14.3% in August compared to 10.3% in July. Service prices rose 3%, slightly down from 3.3% the previous month. Non-energy industrial goods increased 1.2%, up from 0.9% in July, while food, alcohol, and tobacco prices rose 1.2%, unchanged from the previous month. The renewed conflict involving Iran and the closure of the Strait of Hormuz have pushed fuel prices higher again. Although core inflation, which excludes volatile items like food and energy, eased to 2.4%, the ongoing Middle East crisis—with no short-term solution in sight—reinforces arguments for a rate hike. Olli Rehn, governor of the Finnish central bank, said Monday he would support raising the ECB’s key rate to 2.5% at the September 10 meeting. “We must not show any complacency regarding these inflationary pressures. We cannot afford an affordability crisis in Europe,” he said. If the ECB raises rates next week, it would become the most hawkish central bank among the G7 economies, according to Bloomberg. This comes despite little evidence of second-round effects on wages. Ronald Temple, chief market strategist at Lazard, noted that “there are few, if any, signs that second-round effects from higher energy prices are creating more systemic inflationary pressure.” Leo Barincou, an economist at Oxford Economics, added that “inflation is likely to remain well above target into next year, as higher gas and food prices will add further upward pressure. With inflation still accelerating, it is almost certain the ECB will raise rates next week, in line with our forecasts. However, we think it is too early to assume a third increase, especially given that underlying price pressures remain contained for now.” Among Europe’s largest economies, Spain saw the sharpest price rise, with inflation climbing to 4.5% in August. Italy recorded 3.2%, while Germany and France saw increases of 2.9% and 2.7%, respectively.