Inflation dynamics and ECB outlook
Inflation in the euro area jumped to 3.3% in August, up from 2.9% in July. Once again, rising energy prices in the wake of the conflict in the Middle East were largely responsible for this.
Overall, the inflation rate was in line with expectations, but the core rate unexpectedly fell from 2.5% in July to 2.4% in August.
According to preliminary data from Eurostat, headline inflation jumped in line with advance surveys by economists.
Energy prices to pass through to businesses
In the coming months, many businesses — particularly in manufacturing and food production — are expected to pass on higher energy prices.
In particular, high natural gas prices are likely to drive up costs in these sectors over upcoming quarters, pushing the core inflation rate higher over the course of next year.
ECB rate hike expectations for September
With the headline rate rising to 3.3%, inflation has moved further away from the ECB’s 2% target and closer to staff projections.
Because the ECB staff projections factor in two interest rate hikes, this clearly points to another rate hike in September.
However, further rate hikes after September remain unlikely as the inflation rate is projected to fall again next year.
With headline inflation moving further away from the ECB’s 2% target, market expectations clearly point to another interest rate hike by the European Central Bank in September.
Frequently asked questions
What was the Euro area inflation rate in August?
Headline inflation jumped to 3.3% in August, up from 2.9% in July, while core inflation fell slightly to 2.4%.
What caused the jump in Euro area inflation?
Rising energy prices driven by geopolitical conflicts in the Middle East were the primary factor behind the increase.
Will the ECB hike interest rates in September?
Yes, Commerzbank analysts expect the rise in headline inflation to confirm an ECB interest rate hike at the September meeting.
Are further rate hikes expected after September?
Further rate hikes after September are considered unlikely because inflation is expected to cool down again next year.
FXStreet Insights Team
The Pips School editorial team writes independent educational material on forex markets, broker selection and risk management.
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