Eurozone Inflation Hits Two-Year High, ECB Rate Hike in Play for Next Week

European inflation has picked up to its highest level in over two years, putting pressure on the European Central Bank (ECB) to raise interest rates next week. The euro area's inflation rate rose to 3.3% in August from 2.9% in July, according to data released Tuesday.

This marks the hottest reading since September 2023 and comes as the war involving Iran continues to impact prices. Underlying measures of core inflation, which exclude food and energy costs, eased to 2.4%, while services inflation cooled to 3%. However, elevated oil and gas costs are adding pressure on the economy.

Country snapshots show that Italy's rate rose to 3.2% from 2.9%, Spain's climbed to 4.5% last week, and both Germany and France saw faster inflation in August. Markets and policymakers expect a quarter-point move on September 10, with further steps anticipated after that.

ECB officials are divided on the best course of action. Executive Board member Isabel Schnabel stated that rates still need to rise to bring inflation back to target, while Cipollone has warned against over-tightening, citing potential harm to the economy from second-round effects from the war.