Households and businesses across the eurozone are bracing for a renewed financial squeeze after inflation accelerated sharply through the summer, prompting the European Central Bank to raise borrowing costs for the second time this year.
Eurozone annual inflation hit 3.2% in August, up from 2.9% in July and its highest reading since September 2023, according to figures published by the EU’s statistics office, Eurostat. The jump was driven overwhelmingly by energy costs, with energy inflation surging to 14.3%, its steepest rate since early 2023, as continued fighting in the Middle East kept a lid on global oil and gas supplies and pushed prices higher across the continent. Prices for unprocessed food and non-energy industrial goods also picked up pace over the month.
The scale of the increase caught many households off guard after more than a year in which inflation had drifted closer to the ECB’s 2% target. Behind the headline number, the picture across the currency bloc’s largest economies was uneven. Inflation in Germany ticked up to 2.9%, while France saw a smaller rise to 2.6%. Spain recorded the sharpest increase among the bloc’s major economies, with inflation jumping to 4.6%, and Italy climbed to 3.2%. The Netherlands was a rare exception, with inflation easing slightly as energy pressures there proved less acute.
Encouragingly for policymakers, the details beneath the headline figure were not uniformly bleak. Core inflation, which strips out volatile energy and food prices and is closely watched by the ECB as a gauge of underlying price pressure, actually eased slightly to 2.4% from 2.5%. Services inflation also cooled to a four-month low of 3.0%. Wage growth across the bloc has moderated too, with the ECB’s own wage tracker pointing to negotiated pay increases running well below the pace seen during the previous inflationary episode. Taken together, these signals suggest the current spike is being driven mainly by an external energy shock rather than a broader wage-price spiral taking hold.
Even so, with headline inflation running well above its target, the ECB’s Governing Council opted to raise its key deposit rate by 25 basis points to 2.50% at its September meeting, the second increase this year following a move earlier in the summer. Policymakers said the decision to tighten policy was judged to be robust across a range of scenarios for how the current shock might evolve, reflecting concern that persistently high energy costs could eventually feed through into broader price pressures if left unaddressed. Officials have signalled they do not expect to raise rates further in the near term, betting that the current spike will prove temporary as energy markets stabilise, but they have stopped short of ruling out further action if conditions warrant it.
The rate increase adds to what has already been a difficult year for parts of the eurozone economy. Economists have flagged growing concern over France in particular, where a hung parliament has made it far harder for the government to agree a credible plan to bring down its budget deficit, currently on track to remain above 5% next year, with public debt approaching 120% of GDP. Forecasters have downgraded their outlook for French growth to just 0.4% this year, with the country’s 2027 presidential election adding further uncertainty over the prospects for meaningful fiscal reform in the near term.
For consumers, the immediate impact of higher rates is likely to be felt most acutely through mortgage and business lending costs, at a moment when many households are already absorbing sharply higher energy bills heading into the winter heating season. Small and medium-sized businesses, many of which remain heavily indebted following earlier borrowing during periods of low interest rates, are seen as particularly exposed to the latest tightening.
Despite the challenges, the broader eurozone labour market has so far shown resilience. Hiring intentions across the bloc have stabilised and unemployment remains close to historic lows, with persistent worker shortages in several sectors expected to discourage the kind of widespread layoffs that might otherwise accompany a period of higher borrowing costs. Analysts will now be watching closely for September’s inflation data, due in the coming weeks, for signs of whether August’s spike marks the peak of the current episode or the start of a more sustained period of price pressure across the currency bloc.
