Eurozone Inflation Climbs to Near Three-Year High Ahead of ECB Meeting — 2nd Update

By Ed Frankl

Eurozone inflation rose for a third straight month in August, reinforcing expectations that the European Central Bank will raise its key interest rate next week for the second time since the outbreak of the war in Iran.

Inflation rose to 3.3%, up from 2.9% in July, the European Union's statistics agency Eurostat said Tuesday, matching consensus expectations from economists polled by The Wall Street Journal. That marked its highest level since September 2023.

Energy costs continue to propel inflation in the 21-nation currency area, having accelerated further in August after an escalation in hostilities in the Middle East drove a rebound in oil-and-gas prices.

"With inflation still accelerating, the ECB is all but certain to hike at next week's meeting," said Leo Barincou, economist at Oxford Economics.

Inflation has remained above the bank's 2% target since March, just after the start of the conflict, and investors have almost fully priced in a quarter-point rate increase on Sept. 9.

However, there are few signs those energy prices have spilled over into other items in the inflation basket or second-round effects such as calls for higher wages that could prompt more aggressive action by the central bank. Annual services inflation, which is particularly exposed to labor costs, fell to 3.0% in August, from 3.3% in July, Eurostat said.

"We think it is too early to pencil in a third hike, especially given that underlying price pressures remain contained for now," Barincou added.

Heatwaves in Europe since the spring have prompted concern over rising prices, too, given their impact on agriculture and on transport through drying rivers such as the River Rhine. However, food inflation held at 1.2% in August, the same as in July. Core inflation, which strips out food and energy prices, declined to 2.4% from 2.5%.

Manufacturing input and output prices in the eurozone cooled further in August, though rates of increases were still well above those seen immediately prior to the start of the war, according to a survey of purchasing managers published Tuesday by S&P Global.

Adding to the puzzle, the eurozone's economic growth surprised to the upside in the second quarter of the year, and unemployment held at 6.4% in July, close to its record low of 6.2%.

With a rate hike all but confirmed, investors are set to focus on any communication about the future rate path at next week's ECB meeting.

In the coming weeks, rate setters could emerge with contrasting opinions about whether surging energy inflation will bleed into the more benign core rate. Investors pencil in two further quarter-point increases next year.

Inflation is also well above target in other major economies, including the U.S. Investors see an increased likelihood of a rate rise by the Federal Reserve later this month after Chair Kevin Warsh said Friday the central bank might have "more work to do" if it is to tame inflation.

Indeed, in the coming months, the eurozone's businesses are likely to pass on higher energy prices, particularly in the manufacturing and food-production sectors, Commerzbank economist Vincent Stamer said in a note to clients.

"As a result, the core inflation rate is set to rise significantly over the course of the coming year," he said.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

September 01, 2026 07:26 ET (11:26 GMT)