Euro Zone Inflation Surges, ECB Hike Now All but Certain

Consumer prices in the euro zone rose to their highest level in almost three years in August, increasing pressure on the European Central Bank (ECB) to raise interest rates. The annual inflation rate jumped to 3.3% from a year ago, surpassing expectations and cementing the case for an ECB hike next week.

The sharp rise in headline inflation contrasts with a drop in underlying measures of price increases, according to David Powell, senior euro-area economist. This divergence supports the view that the ECB may not tighten by as much as financial markets are currently pricing in.

Elevated oil and gas prices are feeding inflation pressure across the 21-nation euro area. Separate data showed a sharp increase in Italy to 3.2% from 2.9%, while figures revealed a jump in Spain's reading to 4.5%. The bloc's top two economies, Germany and France, both recorded accelerations in August.

The ECB is expected to raise interest rates by another quarter-point on September 10, with markets fully pricing in this move. However, some policymakers, like Executive Board member Isabel Schnabel, have expressed the need for further rate hikes to bring price gains back to target.