Volatile energy prices pushed Europe’s inflation rate back above 3% for the first time in months during August.
Inflation across the European Union (EU), which is a net importer of oil and natural gas, rose an annualized 3.3% in August, up from 2.9% in July and 2.8% in June of this year.
August’s inflation reading was the highest since September 2024, according to statistics agency Eurostat. The August rise was driven by a 14.3% year-over-year increase in energy costs.
Core inflation, which excludes volatile energy, food, alcohol and tobacco prices, declined to 2.4% in August from 2.5% in July.
The Iran war and blockage of the Strait of Hormuz shipping route have raised the cost of crude oil and refined products. Europe has also been impacted by disruption in the natural gas market.
Futures traders are now pricing in a 98.9% chance of a 25-basis point interest rate hike from the European Central Bank at its next meeting on Sept. 10.
The European Central Bank raised its key interest rate to 2.25% in June of this year, the first increase since 2023, in response to inflationary pressures due to the Iran war.
Economists say the central bank must balance higher interest rates and the risks of a slowdown in economic growth.
Higher interest rates are likely to further squeeze indebted households, slow housing markets, and make investments more expensive for European businesses, say analysts.
