European Central Bank: Inflation risks support another hike - Nordea

Nordea strategists note that Euro-area flash inflation rose to 3.3% year-on-year in August, driven mainly by higher energy inflation, while core inflation edged down to 2.4% on weaker services. They stress that inflation remains above the European Central Bank's (ECB) 2% target and expect further gradual rate hikes, with another move likely in September.

Inflation keeps ECB under pressure

"Inflation moved further away from the ECB’s 2% target, but at the same time, a fall in services inflation will offer the ECB some consolation. Upside inflation risks are still likely to prompt another rate hike next week."

"Euro-area flash inflation for August printed at 3.3% y/y, a new cyclical high, up from 2.9% in July and in line with expectations. The move higher was driven mainly by higher energy inflation, which accelerated from 10.3% to 14.3%."

"Core inflation actually retreated from 2.5% y/y to 2.4% y/y on the back of lower services inflation, which fell from 3.3% to 3.0%. Inflation for non-energy industrial goods, in turn, accelerated from 0.9% y/y to 1.2%, the highest level since early 2024, signalling some broadening of price pressures."

"Core inflation has remained continuously above the ECB’s 2% inflation target since 2021 and is also expected to remain there in the coming years, according to the ECB’s latest staff forecast. Against this background, we think the ECB will continue to raise rates at quarterly intervals, with the next move coming at the September meeting next week."

"We think we will gradually see broadening price pressures and signs of second-round effects, as the economy continues to grow, the labour market remains rather tight and employment continues to increase. "

"At the same time, the war in the Middle East continues and energy prices remain elevated, while the low level of natural gas inventories increases the risk of even higher gas prices during the winter. The ECB is thus likely to continue to worry about upside price pressures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)