Euro zone inflation climbed to 3.3% in August, its highest level since September 2024, driven by rising energy costs tied to the Iran war. Traders now price a 98.9% probability of a rate hike from the European Central Bank at its September meeting, though economists warn of the toll on indebted households and small businesses.
Euro zone inflation rose to 3.3% in August from 2.9% in July, the highest reading since September 2024, according to a flash estimate from Eurostat. The jump puts the European Central Bank under pressure to raise interest rates again at its September meeting.
Energy Costs Drive the Jump
Energy inflation accelerated to 14.3% from 10.3%, as the Iran war and the blockage of the Strait of Hormuz pushed up crude oil and refined product costs. Core inflation, which excludes energy, food, alcohol and tobacco, dipped to 2.4% from 2.5%.
A Second Rate Hike Looks Likely
Traders on Tuesday morning priced a 98.9% probability of a 25 basis point increase to 2.5% at the ECB's Sept. 10 meeting, according to LSEG data. The move would follow the ECB's June increase to 2.25%, its first hike since 2023.
Economists Warn of a Second Blow
Joe Nellis, head of economic research at MHA, said the central bank will be wary that short-term price pressures become structural, feeding into wages and services inflation. According to CNBC: "The ECB faces a dilemma: a trade-off between higher interest rates and economic cost." He added that another rise in financing costs could leave small and medium-sized businesses postponing or abandoning investment plans altogether.
Source: CNBC
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