Markets Await Eurozone August Inflation Data Later Today

Headline annual inflation in the eurozone is forecast to edge up to 3.3%, compared with the previous reading of 2.9%. Core annual inflation is seen holding steady at 2.5%. Market focus remains on core prices, which, while not expected to rise, have not returned to the 2% target either.

A broader concern is that rising headline prices, driven by factors such as higher energy costs, could eventually spill over into other categories like food and services.

Therefore, stable core prices should not automatically be interpreted as a positive signal. The full report must be assessed alongside recent global developments affecting price pressures.

The ongoing US-Iran conflict is likely to complicate the inflation outlook, particularly as energy prices stay elevated and shipping disruptions continue to strain supply chains and raw material costs.

In light of this, the European Central Bank recognises the need to guard against the risk of inflation pressures worsening. There is worry that second-round effects could emerge further down the line.

As a result, a September rate hike appears increasingly assured, especially given recent central bank communications. Traders are pricing in roughly a 98% probability of such a move this month, with another 25 basis point hike anticipated by February.

As previously noted, a September rate hike would only push ECB monetary policy into mildly restrictive territory. That alone may not suffice if inflation requires a more aggressive response, making this more of an initial step by policymakers.