Eurozone inflation accelerates above 3%

Eurozone inflation accelerated to 3.3% in August, strengthening market expectations that the European Central Bank will raise interest rates by a quarter percentage point the following week.

The preliminary figure from Eurostat matched economists’ expectations cited by Reuters and compared with 2.9% in July. The ECB aims to keep inflation at 2% over the medium term.

Energy prices drove much of the increase, rising 14.3% from a year earlier. Food, alcohol and tobacco prices rose 1.2%, industrial goods increased 1.2% and services became 3% more expensive.

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The new data reinforce financial markets’ view that the central bank will very likely raise its policy rate next week.

Core inflation, which excludes the direct effects of volatile energy and food prices, eased to 2.4% from 2.5% in July. Nordea chief analyst Jan von Gerich said the new figures reinforced expectations of a rate increase. OP market economist Jari Hännikäinen called such a move almost certain.

Inflation varied across the region. It stood at 1.3% in Estonia, the lowest rate in the preliminary data, and 2.4% in Finland, which had the third-lowest rate. Lithuania recorded the highest rate, at 5.8%.

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In my view, it is almost certain that the central bank will raise its policy rate next week.