Euro zone inflation rose to 3.3% in August, the highest level since September 2024, as energy costs surged, according to data from Eurostat. The increase from 2.9% in July was driven almost entirely by higher energy prices, with crude oil and natural gas costs climbing as conflicts in Iran and Ukraine continue to pressure markets.
Core inflation, which strips out volatile food and fuel prices, fell to 2.4% from 2.5%, offering some reassurance that the energy price shock is not yet triggering broader price pressures. Growth in services prices, the largest component of the consumer basket, slowed to 3% from 3.3%.
The data aligns with the European Central Bank's own projections and has cemented expectations for a rate hike at its September 10 meeting. Financial investors have largely priced in a 0.25 percentage point increase to the deposit rate, which would be the bank's second move this year after a hike in June. Policymakers have signaled little appetite for signaling further moves, and economists see a high chance the bank will pause after this month, holding rates at what many consider the top of a "neutral" range.
Across the Atlantic, Federal Reserve officials have struck a more hawkish tone. Governor Michael Barr said Tuesday he would support an interest rate hike if inflation does not ease, expressing concern about "broader price pressures taking hold." Speaking at a banking forum in Washington, Barr said that while he could take more time to assess policy if data gave him confidence inflation was moderating toward 2%, he would "act decisively to raise rates" if inflation did not moderate sufficiently.
Fed Chair Kevin Warsh, speaking at the Jackson Hole symposium last week, said recent inflation readings had been "better than expected" but did not tell him that underlying trends had "meaningfully improved." He indicated the central bank would have "work to do" if the trend did not move down.
Kansas City Federal Reserve President Jeffrey Schmid described inflation as "still stubborn and it's still sticky," adding that Fed members would "have our work cut out for us as we move into the cycle." Cleveland Fed President Beth Hammack said earlier this month that more than one rate hike could be needed and stated last Thursday that "now is the time" to act.
The inflation figures come amid broader concerns about economic growth, which remains at just around 1% in the euro zone, and labor markets that have shown relatively little wage pressure. Analysts suggest the ECB's decision next week is likely to be straightforward, with the focus shifting to the future path of rates as views diverge on how persistent inflation will be.