European Inflation Shows Energy Shock Still Limited

Data releases this week were limited, but tier-two indicators and August inflation estimates from individual euro area countries provided some insight into price movements. In France, inflation rose to 2.7% year-over-year (y/y), while in Spain it hit 4.5% y/y, driven by higher energy prices, particularly motor fuels.

However, the underlying inflation remained subdued, with core inflation declining in both countries. This suggests that the energy shock has not yet generated indirect effects or second-round effects six months after the Iran war started.

This supports the view that the European Central Bank (ECB) will hike rates by 25 basis points in September, as markets have fully priced this move. However, further hikes are unlikely compared to market pricing of almost one additional increase thereafter.