Inflation Rises Again Above 3 Percent in Eurozone

Inflation in the eurozone rose above 3 percent again in August, driven primarily by energy costs linked to the Iran war.

Eurostat, the statistical office of the European Union, said in its Sept. 1 flash estimate that annual inflation rose to 3.3 percent in August, up from 2.9 percent in July.

This is higher than the European Central Bank’s (ECB’s) target of 2 percent.

The last time eurozone inflation was above 3 percent was in May, when it was at 3.2 percent, before dropping to 2.8 percent in June.

Eurostat said that energy would have the highest annual rate in August, at 14.3 percent compared to 10.3 percent in July.

This is followed by services (3 percent, down from 3.3 percent in July); non-energy industrial goods (1.2 percent, up from 0.9 percent); and food, alcohol, and tobacco (1.2 percent, unchanged from July).

However, underlying price pressures remained modest, offering some reassurance to policymakers that the energy price surge is not yet triggering the kind of second-round effects that could perpetuate rapid inflation and force the ECB into more aggressive action.

Core inflation—which excludes volatile food and fuel prices—eased to 2.4 percent last month from 2.5 percent, as growth in services ​prices, the single biggest component of the consumer price basket, slowed to 3 percent from 3.3 percent.

The eurozone, which relies on energy imports, has been particularly affected by disruptions to oil, gas, and other shipments through the Strait of Hormuz, a critical route that handles approximately a fifth of the world’s oil traffic.

The eurozone is the economic region within the EU comprising 21 of the 27 member states that use the euro.

Not the Inflation Surge of 2021–22

The ECB said in a Sept. 1 blog post that while this period of rising inflation might resemble the inflation surge of 2021–22, its drivers are different.

It said that 2021–22 started with higher energy costs, but was also marked by COVID-19 pandemic-related supply shortages, strong demand following the lockdowns, and public policy support—largely demand-side pressures.

“In 2026, by contrast, the rise in inflation has so far been driven almost entirely by higher energy costs” due to pressures on supply, the ECB wrote.

The blog post authors noted that roughly 90 percent of the inflation surge between January and May was driven by adverse energy supply shocks stemming from the Iran war and the closure of the Strait of Hormuz.

The differences between these two periods will influence how the central bank responds, they wrote.

“These differences in inflation dynamics carry important implications for monetary policy. While the ECB raised interest rates forcefully and persistently in response to the 2021-22 surge, the monetary policy response to the current episode has been more gradual,” the post reads.

The authors note that because this year’s inflation is driven by energy supply shocks rather than consumer demand, the more measured policy response the central bank is currently taking is appropriate.

Reuters contributed to this report.