Eurozone Inflation Soars to War-Time High as Core Rate Remains Steady

The Middle East conflict has pushed eurozone inflation to its highest level since the start of the war, but core inflation remains surprisingly contained. Headline inflation jumped from 2.9% in July to 3.3% in August, driven by higher energy prices. The year-on-year increase in energy inflation is now a significant 14.3%, while goods inflation has also risen to 1.2%. However, food and services inflation remain relatively stable.

Despite the jump in headline inflation, core inflation has held steady at 2.4%, exactly where it was in February before the conflict began. This suggests that businesses have not yet passed on higher energy costs to consumers. However, economists warn that this could change as the conflict continues and energy prices remain high.

Upside risks abound, including further increases in energy prices, droughts impacting supply chains, and a strong economy making it easier for businesses to pass on higher costs. Indicators of wage growth have also started to move up, which could lead to higher core inflation in the months ahead.