Euro-Area Inflation Strengthens as US-Iran Strikes Boost Oil

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(Bloomberg) — Euro-area inflation picked up in July after the collapse of a US-Iran ceasefire boosted oil prices, reinforcing expectations that the European Central Bank will need to raise interest rates again.

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Consumer prices increased an annual 2.9% after 2.8% in June, Eurostat said on Friday. The reading is in line with the median estimate in a Bloomberg survey and follows stronger-than-anticipated upticks in France and Spain.

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Across the 21-nation bloc, energy surged 10%, while a gauge for services and one excluding volatile items such as fuels and food also accelerated.

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The report comes a week after policymakers took a break from lifting borrowing costs, allowing more time to collect information on how a re-escalating conflict in the Middle East affects euro-zone inflation and growth. Economists and investors predict a hike in September, adding to June’s quarter-point step.

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By then, officials will have received one more set of inflation figures — for August — as well as updated projections prepared by ECB staff. While President Christine Lagarde refused last week to pre-commit to a move, some of her peers have left little doubt about the direction for policy ahead.

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Governing Council member Gediminas Simkus from Lithuania said that the probability of a hike is “much higher” than that of a hold. His Slovak colleague Peter Kazimir went one step further, arguing that the ECB will have to raise rates at least once more “even if the situation improves somewhat.”

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For the moment, signals from the Middle East are mixed, after shipping through the Strait of Hormuz picked up recently even as the US and Iran returned to exchanging air strikes. Oil prices — while back below $100 a barrel — remain elevated.

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Meantime, an ECB survey showed pay growth, which officials track closely for signs that higher energy costs will lead to permanently higher inflation, is poised to accelerate through early 2027.

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Still, the euro-zone economy has weathered the crisis remarkably well. Output expanded at the strongest pace in more than a year in the second quarter and twice as much as forecast, with all of the region’s top four nations recording growth.

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—With assistance from Joel Rinneby, Harumi Ichikura and Barbara Sladkowska.

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