Euro area: Inflation jump supports ECB hike – Commerzbank

Commerzbank’s Dr. Vincent Stamer notes that Euro area headline inflation rose to 3.3% in August from 2.9% in July, driven mainly by higher energy prices linked to the Middle East conflict. Core inflation edged down to 2.4%, but the renewed move above 3% is seen as cementing an ECB rate hike in September, with further hikes unlikely as inflation is projected to ease next year.

Inflation dynamics and ECB outlook

"Inflation in the euro area jumped to 3.3% in August, up from 2.9% in July. Once again, rising energy prices in the wake of the conflict in the Middle East were largely responsible for this. Overall, the inflation rate was in line with expectations, but the core rate unexpectedly fell from 2.5% in July to 2.4% in August."

"We expect that in the coming months, many businesses – particularly in the manufacturing and food production sectors – will pass on the higher energy prices. In particular, high natural gas prices are likely to drive up costs in these sectors in the coming quarters. As a result, the core inflation rate is set to rise significantly over the course of the coming year."

"With the headline rate rising to 3.3%, inflation has moved further away from the ECB’s 2% target. Furthermore, inflation is moving ever closer to the ECB’s staff projections (Chart 2), in which the ECB has factored in two interest rate hikes. This clearly points to another interest rate hike by the ECB in September."

"It is unlikely that further rate hikes will follow after that, as the inflation rate is expected to fall again next year, in line with the ECB’s projections."

"According to preliminary data from Eurostat, headline inflation in the euro area jumped to 3.3% in August – up from 2.9% in July. Economists surveyed in advance had expected this. By contrast, the inflation rate excluding energy, food, alcohol and tobacco (core inflation) unexpectedly fell from 2.5% in July to 2.4% in August."