Euro Zone Inflation Ticks Up Slightly, Reinforcing Expectations of Steady ECB Rates
Euro zone inflation edged up slightly in August, remaining close to the European Central Bank’s (ECB) 2% target and strengthening market expectations that interest rates will stay on hold in the near term.
Data released by Eurostat today shows that annual inflation in the 20 euro area countries rose to 2.1%, up from 2.0% in July. The increase was slightly above the 2.0% forecast in a Reuters poll, driven by a rise in unprocessed food prices and a smaller drag from lower energy costs.
Core inflation — which excludes volatile food and energy prices — held steady at 2.3%, defying expectations for a slight drop to 2.2%. This measure is closely watched by the ECB as a signal of underlying price pressures.
The latest figures align with the ECB’s projection that inflation will hover around the 2% target through the end of the year. Slower goods inflation and easing energy prices are helping to counterbalance persistent cost increases in food and services.
This relative stability has reinforced market confidence that the ECB will maintain current interest rates for the rest of the year, following two percentage points of rate cuts since mid-2024. However, internal debate remains over whether further easing may be needed in 2026 if inflation undershoots the target.
Some policymakers have begun warning about the risks of inflation falling too low — a scenario reminiscent of the pre-pandemic years. However, ECB Executive Board member Isabel Schnabel argued today that the risks are actually tilted to the upside, citing solid economic growth and global trade disruptions that could push costs higher.
“It is important to acknowledge that we cannot fine-tune inflation in a way that it is always at 2% in a shock-prone world,” Schnabel told Reuters. “We can tolerate moderate deviations of inflation from target in either direction.”
Not all policymakers share Schnabel’s view, and discussions around further easing — particularly if inflation falls persistently below target — are expected to intensify in early 2026.
The ECB’s next policy meeting is scheduled for September 11, where economists broadly expect the deposit rate to remain unchanged at 2%. Still, some forecasters are leaving room for a potential “insurance” cut later this year or early next, should inflation remain below target for an extended period.