Eurozone Inflation Expected to Rise Amid Higher Energy Prices

Annual inflation in the Eurozone is expected to increase again in September due to higher oil and gas prices, according to Continuum Economics. The energy component of Consumer Price Index (CPI) has contributed significantly to the rise in headline inflation, with a 1.6 percentage point gain since February.

The European Commission's Selling Prices indicator also points to a strong increase in EZ September, driven largely by the energy sector. However, there is little evidence of inflationary pressures in the Services component of CPI, which has remained steady around the 3% mark this year.

Continuum Economics notes that the impact of higher energy and fertiliser prices, alongside adverse weather events, will likely push up food's contribution to CPI. The ECB is concerned about second-round effects, where an initial oil shock feeds into wage setting, pricing, and inflation expectations.

The transmission from higher inflation to higher wages is not automatic and depends on the state of the labour market and broader supply and demand conditions in the economy. Continuum Economics believes that second-round effects will not materialise beyond first-round effects and that the ECB will only need to hike one more time in this cycle, to 2.75%.