Eurozone Inflation Jumps to 3.3%, an ECB Rate Hike Now Looks Likely
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Price pressure in the eurozone picked up markedly in August. Goods and services cost an average of 3.3 percent more than a year earlier, up from 2.9 percent in July, according to a first estimate released by the EU statistics office Eurostat. That leaves inflation well above the European Central Bank’s target of 2.0 percent. Economists polled by Reuters had expected exactly this rate, while estimates from the German state banks LBBW and Helaba came in considerably lower.
For monetary policy, the direction is now set. An ECB rate increase next week is considered highly likely. Vincent Starmer, an analyst at Commerzbank, sees the move as a certainty after the new price data. KfW economist Stephanie Schönwald agrees: “For the ECB, this reading should be enough to take another step up in September.” Markets are firmly pricing in a key rate of 2.5 percent. The Governing Council decides next Thursday and will publish fresh projections for inflation and growth at the same time.
Energy Drives Prices Up While Services Cool
Energy remains by far the strongest driver. It became 14.3 percent more expensive year on year in August, with the pressure intensifying once again. Industrial goods rose by 1.2 percent.
Services, by contrast, eased slightly, from 3.3 to 3.0 percent. As a result, core inflation excluding volatile items such as energy and food actually edged down to 2.4 percent. That split is what makes the decision tricky: the core is cooling while the headline rate runs away.
Austria Shows the Same Pattern
Austria mirrors the eurozone picture. According to a flash estimate from Statistics Austria, inflation climbed to 3.2 percent in August from 2.8 percent in July. Prices rose 0.6 percent compared with the previous month. Fuel and heating oil pushed the rate back up, and energy overall cost ten percent more than a year earlier.
The biggest single driver, though, was services, up 4.3 percent, because they carry far more weight in the basket. Food, tobacco and alcohol rose just 0.2 percent, held down by the VAT cut on selected staple foods that took effect at the start of July. Core inflation stood at 3.0 percent, and the harmonised index used for European comparisons came in at 2.9 percent.
Central Bankers Signal Their Preference
Several policymakers have recently indicated a preference for higher rates, among them German ECB Executive Board member Isabel Schnabel, who publicly called for a September rate increase. Austrian central bank governor Martin Kocher said this week that upside risks to inflation have risen again. “If the next ECB forecast confirms this picture, I consider a further rate increase in the near future to be necessary,” Kocher said.
The rate outlook is already feeding through to bond markets. The yield on ten-year German Bunds stood at 3.36 percent in morning trading, up four basis points and a fresh 15-year high. Yields are climbing in other economies too. For startups and tech companies, the message is clear: debt is getting more expensive again, and the valuation logic behind growth businesses is back under pressure.
A Supply Shock Rather Than a Demand Boom
Why the ECB has moved cautiously so far despite a 3.3 percent rate is something the bank has explained itself, in a blog post published this week. Economists Kristina Barauskaitė Griškevičienė and Claus Brand show that the current surge stems almost entirely from adverse energy supply shocks, triggered by the war in the Middle East and the closure of the Strait of Hormuz. Between January and May, the headline rate rose from 1.7 to 3.2 percent, with monetary and fiscal policy exerting a mild dampening effect along the way.
That sets the situation apart from the inflation surge of 2021 and 2022, when supply chain disruptions, pent-up demand after lockdowns, energy costs and expansionary fiscal and monetary policy all converged. Back then the ECB responded with rapid and forceful steps. Supply shocks, however, push inflation and economic output in opposite directions, which argues for a more measured response.
One finding is particularly relevant for the tech sector: the authors can find no evidence yet of a demand boost from AI investment across the eurozone as a whole. Such effects may well exist in individual countries or sectors, but they have not shown up in the aggregate data.
The ECB raised rates in early summer for the first time in three years, then paused. Its aim is to stop the energy price shock caused by the war with Iran from spreading through the broader economy and becoming entrenched via wages and service prices. Thursday’s new projections will reveal how persistent the central bank itself expects inflation to be.
