Euro zone inflation climbed back above 3% in August, driven by surging energy prices linked to the ongoing Iran war and its disruption of global supply chains.
Headline inflation in the euro area rose to 3.3% in August, up from 2.9% in July and 2.8% in June, reaching its highest level since September 2024.
The figures were published in a flash estimate by Eurostat, the European Union’s official statistics office, on Tuesday morning.
Energy inflation proved the primary driver, accelerating sharply to 14.3% in August from 10.3% the previous month, reflecting the euro zone’s heavy dependence on imported energy.
The Iran war and the blockage of the Strait of Hormuz have pushed up the cost of crude oil and refined products, while natural gas markets have also been severely disrupted.
Core inflation, which strips out the volatile components of energy, food, alcohol and tobacco, actually dipped slightly to 2.4% from 2.5%, offering a modest silver lining within the otherwise concerning data.
Markets moved swiftly to price in a response from the European Central Bank, with LSEG data showing a 98.9% probability of a 25 basis point rate increase at the ECB’s September 10 meeting.
Such a move would lift the ECB’s key rate to 2.5%, following June’s hike to 2.25%, which was itself the first increase since 2023 and came in response to inflationary pressures from the Iran conflict.
Businesses already struggling under the weight of elevated energy costs now face the prospect of a second blow in the form of tighter borrowing conditions across the bloc.
Joe Nellis, head of economic research at MHA, warned that the central bank would be wary of short-term inflation pressures becoming structural and feeding into wages and services inflation.
“The ECB faces a dilemma: a trade-off between higher interest rates and economic cost. Higher borrowing costs will continue to squeeze heavily indebted households, weaken housing markets and make investment more expensive for businesses,” Nellis said.
“For SMEs in particular, another increase in financing costs could mean investment plans being indefinitely postponed or abandoned altogether,” he added, highlighting the acute pressure facing smaller enterprises.
The ECB must now navigate a delicate path between controlling inflation and avoiding further damage to an already fragile European economy in the months ahead.