Energy prices push eurozone inflation to 3.3%; ECB to hike next week

Energy prices in August increased again compared to the previous month (2.9% m/m). Fuel prices rose due to higher oil prices, but also because of higher transportation costs due to low Rhine water levels and higher refinery margins due to stretched production capacities worldwide. Indeed, petrol and diesel pump prices have risen much more than crude prices in recent months. Compared to the previous year, energy inflation rose to 14.3%, setting a new high for this year – reflecting also the prior unwind of temporary tax cuts. Wholesale gas prices have also increased significantly in recent weeks, which is gradually feeding through to higher home gas and electricity tariffs.

Food inflation remained at 1.2% y/y in August. There are currently few signs of rising price pressures at the consumer level as a direct consequence of the closure of the Strait of Hormuz. However, we expect price pressures on food to increase eventually due to drought in Europe and high diesel prices, which are particularly relevant for agriculture. The El Niño outlook is also pushing some global commodity prices higher recently (eg. wheat and rice). On the positive side, wholesale fertiliser prices – which had surged in the beginning of the Iran conflict – have now largely normalised, and remain stable despite the ongoing disruption to Hormuz.

Goods inflation picked up further to 1.2%, after 0.9% in July and 0.7% in June. For goods, we expect pipeline price pressures to continue to pass through the various stages of production. This is being driven not only by the energy price shock, but also by other supply chain disruptions resulting from the closure of the Strait of Hormuz. We note particular price increases for electronics, probably related to the AI boom and rising chip prices.

Services inflation fell to 3.0% in August, down from 3.3% in July. This was the principle driver of the decline in core inflation to 2.4% in August, after 2.5% in July. We expect services inflation to decrease somewhat further before levelling off at an elevated rate compared to pre-pandemic rates, as services prices usually react to inflation in other categories with a lag.

In terms of the country breakdown, there is still considerable variation among the major economies. Inflation rose particularly sharply in Spain, from 3.9% in July to 4.5% in August. Inflation in Italy increased from 2.9% in July to 3.2% in August. In Germany, the Netherlands, and France, inflation rates of 2.9%, 2.8%, and 2.7%, respectively, were somewhat lower than in Spain and Italy, but still clearly above the ECB's 2% target.

ECB will hike interest rates next week

We have long expected the ECB to hike interest rates by a further 25bp at its 10 September Governing Council meeting, taking the deposit rate to 2.5% next week. We expect Christine Lagarde to continue to sound hawkish regarding elevated inflation and potential second-round effects. The longer energy prices remain elevated, the greater the risk of bigger second-round effects. Our base case still sees second round effects staying contained, but persistent elevated headline inflation does raise the risk of further ECB tightening.