LONDON (Reuters): Inflation in the eurozone rose slightly in August, according to official data on Tuesday, likely firming up market bets that the European Central Bank (ECB) will keep interest rates unchanged next week.
Price growth, the ECB’s primary focus, has slowed sharply in recent years and has been on target for months, a rare success for the bank, which undershot its mark for a decade before the pandemic, only to struggle with runaway prices in subsequent years.
Inflation in the 20 nations sharing the euro picked up to 2.1% in August from 2% in July, driven by a rise in unprocessed food prices and a smaller drag from lower energy costs, data from Eurostat showed.
Analysts polled by Bloomberg and Reuters had predicted the level of inflation rate would remain unchanged at 2%, the ECB’s target.
The rise reinforces expectations that the central bank will keep rates unchanged at its next monetary policy meeting on Sept. 11.
The ECB held rates steady at 2% at its last meeting in July, ending a streak of consecutive cuts stretching back to September 2024.
Tuesday’s data showed core inflation – which strips out volatile energy, food, alcohol and tobacco prices – held steady in August at 2.3%, above expectations for a fall to 2.2%, even as crucial services inflation continued.
Energy prices, however, fell by 1.9% – significantly less than the 2.5% drop recorded in July.
Food, alcohol and tobacco price rises eased to 3.2%, from 3.3% the previous month. Services price increases were similarly down to 3.1% from 3.2% in August.
“The descent in services will continue, helped by cooling wage growth,” Riccardo Marcelli Fabiani at Oxford Economics said. “Favorable prices in international markets and a stronger euro will keep energy inflation negative and lower imported costs.”
The figures confirm the ECB’s own projection for inflation to oscillate around target through the end of the year, as muted goods inflation and moderating energy prices offset still robust growth in the price of food and services.
This relative calm in price growth is why markets expect steady interest rates in the coming months, even if policymakers are still likely to debate whether more easing may be needed on top of the two percentage points of rate cuts made since mid-2024.
Such a debate could pick up pace in early 2026 as price growth is expected to undershoot the 2% target, albeit temporarily, raising worries that too low inflation could get entrenched, much like it did in the pre-pandemic years.
For now, markets see just a one-in-four chance of a rate cut by December, but pricing goes above 50% by early spring, suggesting that a debate on more easing is far from over.
Anticipating this, ECB board member Isabel Schnabel argued on Tuesday that risks to inflation were actually skewed toward higher readings and she saw no risk of price growth getting stuck under target since economic growth was healthy and trade turmoil would exert upward pressure on costs.
“It is important to acknowledge that we cannot fine-tune inflation in a way that it is always at 2% in a shock-prone world,” Schnabel told Reuters. “We can tolerate moderate deviations of inflation from target in either direction.”
Other policymakers are less confident in the outlook and continue to openly discuss the possibility of more easing further out.
Expectations diverge further out and some still anticipate an “insurance” cut either at the end of the year or early 2026 to signal that persistent undershooting of inflation will not be tolerated.
“With slow growth, significant risks of downside surprises still prevalent, and the Federal Reserve expected to resume cutting rates again, the doves on the governing council could still push for one more cut before holding steady,” ING economist Bert Colijn said.
“Succeeding at that would be a tall order, as the case for holding steady is now quite solid.”
