Eurozone Inflation Rises to 3.3 Percent in August, Rate Hike Expected

Eurozone inflation rose to 3.3 percent in August, according to a preliminary estimate published by Eurostat on Tuesday.

This figure is above July's 2.9 percent rate and marks the highest level in three years, leaving inflation farther from the European Central Bank's (ECB) 2 percent target. Energy costs accounted for most of the acceleration, with annual energy inflation climbing from 10.3 percent in July to 14.3 percent in August. The increase in energy prices reflects disruption to oil and gas markets caused by the conflict in the Middle East, including the Iran war and the near-total closure of the Strait of Hormuz.

Traders have locked in expectations for the ECB to hike interest rates at its September 10 meeting, with market pricing on Tuesday morning putting a 98.9 percent probability on a 25 basis point increase to 2.5 percent. The ECB raised its key rate to 2.25 percent in June, its first hike since 2023, in response to global inflationary pressures.

Core inflation, which excludes energy, food, alcohol, and tobacco, dipped to 2.4 percent in August from 2.5 percent in July. Services inflation eased from 3.3 percent to 3 percent, while food, alcohol, and tobacco inflation remained at 1.2 percent. Non-energy industrial goods inflation edged up from 0.9 percent to 1.2 percent. The measure excluding energy was 2.2 percent, considerably below the headline figure.

Christine Lagarde, the ECB's chief, warned in July that the energy shock from the conflict could intensify further. Joe Nellis, head of economic research at MHA, stated the ECB will be wary that short-term inflation pressures become structural, feeding into wages and services inflation. Kamil Kovar at Moody's Analytics added that the ECB will hike again next week. German inflation rose to 2.9 percent in August, coming in below expectations.