Euro area CPI jumps in August on dearer energy, base effects

Consumer price inflation in the euro area accelerated in August on the back of dearer energy and base effects, potentially piling on the pressure on the European Central Bank.

Eurostat confirmed that the annual rate of increase in the euro area's Consumer Price Index jumped from a 2.2% pace for July to 3.0% in August.

While that increase was in line with economists' expectations, many believed that it had further to rise.

Energy was a key culprit, with prices accelerating further, from the 14.3% pace observed in July to 15.4%.

But it wasn't all about energy and base effects.

So-called core CPI inflation, which excludes volatile components such as food, energy, and alcohol and tobacco, also picked up, from 0.7% to 1.6%.

Boosting core CPI was a pick up in non-energy goods inflation from 0.7% to 2.6%, albeit chiefy due to 'base effects', said Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.

Annual services' inflation meanwhile only edged from 0.9% to 1.1%.

Vistesen had penciled-in a further rise in inflation before the end of the year due to another - albeit small - advance in energy prices, courtesy of higher prices for natural gas and a higher core rate.

In January, CPI would moderate as the base effects from the German VAT reduction in 2020 dropped out, he added.

Vistesen also believed that while the European Central Bank was already anticipating such an increase, it was likely to prove "uncomfortable" for financial markets.

Underscoring that view, on the same day the Financial Times had reported that internal ECB models pointed to CPI hitting the central bank's target earlier, by 2025, implying a shorter timeline for interest rate hikes, but the ECB contested the accuracy of the report.

The analyst continued, saying: "We’re sticking to our view that what we expect to be the end of the PEPP in Q1 next year will be accompanied by a lift of the APP, to around €40B per month, but we also now think the ECB will have to make this decision in the context of higher-than-anticipated inflation."