Eurozone inflation expected to hit 3% ahead of ECB hike

Eurozone inflation is expected to climb to 3.0% in August when preliminary Eurostat data lands on Sept. 1, reinforcing expectations that the European Central Bank will raise interest rates by 25 basis points at its Sept. 10 meeting. The anticipated reading, up from July's 2.9%, would mark another month above the ECB's 2% medium-term target and add pressure on policymakers already signaling readiness to act.

Rate Hike All but Certain

ECB policymakers are prepared to raise the deposit rate to 2.50% from 2.25% at next month's meeting, three sources told Reuters Thomson Reuters Corporation ↘ 4.69% last week, though they have little appetite to signal further tightening beyond September. The ECB first raised borrowing costs in June for the first time in nearly three years to contain spillover from the Iran conflict's impact on energy prices.reuters+1

Swap markets currently price in a roughly 96% probability of a September hike, while prediction markets show similar odds. Michael Field, Morningstar's ↘ 1.22% chief European markets strategist, called the move "almost nailed-on," noting that European inflation sits "firmly above" the ECB's target.global.morningstar+1

Energy Driving the Surge

Goldman Sachs The Goldman Sachs Group, Inc. ↘ 0.36% forecasts an even sharper rise, projecting headline inflation at 3.36% year over year in August, with energy prices surging 14.4% compared to 10.3% in July. Core inflation, which strips out energy and food, is expected to edge up to 2.6% from 2.5%.global.morningstar+1

Joachim Schallmayer, head of capital markets and strategy at DekaBank, expects inflation to remain above 3% this year and potentially peak around 3.5%, though he sees a relatively quick decline in the spring due to base effects. Goldman Sachs economists forecast headline inflation peaking at 3.4% in the fourth quarter before gradually declining, with core inflation not returning to 2% until late 2028.global.morningstar

What Comes Next

Despite the near-certainty of a September hike, the path beyond remains uncertain. Long-term inflation expectations are still anchored at 2%, and ECB governors see no need to commit to further tightening, according to the Reuters sources. Financial markets expect one or two additional hikes after September.kfgo+2

European gas markets pose an additional risk heading into winter. Morningstar expects EU gas storage to hit just 69% by Nov. 1 — an all-time low for that date — leaving Europe more dependent on LNG imports and vulnerable to price spikes if the winter turns cold. ECB executive board member Isabel Schnabel reinforced the hawkish stance last week, telling Bloomberg that "further tightening will be necessary" to return inflation to target.global.morningstar