Eurozone Inflation Tops 3% in August, Strengthening Case for ECB Hike

Eurozone inflation accelerated to 3.3% in August, up from 2.9% in July, driven largely by higher energy costs, according to data from Eurostat. The rise solidifies market expectations that the European Central Bank (ECB) will raise its deposit rate to 2.50% at its September 10 meeting, its second hike this year.

Underlying price pressures, however, remained subdued. Core inflation, which excludes volatile food and fuel prices, eased to 2.4% from 2.5%, as services price growth slowed to 3.0% from 3.3%. This suggests that the energy-driven surge has not yet triggered broader second-round effects that could force more aggressive policy action.

The ECB has widely signaled the September move, making it a near non-event for markets. Attention now shifts to the future rate path, where opinions diverge on how persistent inflation will be. Some policymakers see the current level as near the top of the 'neutral' range, while financial markets price in two more hikes over the next year, partly due to the ongoing Iran conflict keeping energy prices elevated.

Economic growth remains weak at around 1%, and the labour market is relatively soft, with no visible rise in wage growth. These factors support the view that only gentle tightening may be needed. However, rising natural gas prices and resilience in the broader economy could prompt further action, possibly after skipping the October meeting and awaiting new projections in December.