Inflation in France accelerated in August, bolstering evidence of persistent pressures in the region. Consumer prices in the second largest economy of the Eurozone increased by 5.7% year-on-year, a much faster rise than the median forecast of 5.4% from the consensus.
Meanwhile, inflation remained above 6% in Germany and accelerated to 2.4% in Spain.

Policymakers now sense an unwavering strength in consumer prices in three out of the four largest economies in the region.
Members of the ECB’s Governing Council had announced that inflation data would be crucial to the decision on September 14th, whether to raise rates for a 10th consecutive meeting or pause their historic tightening campaign.

The council is divided, and despite the upward-trending price data, officials in favour of maintaining interest rates will likely emphasize the economic gloom. Confidence is deteriorating rapidly, and the latest survey of purchasing managers showed a worsening crisis in the manufacturing and services sectors for the first time this year. A confidence survey by the European Commission on Wednesday indicated deterioration for the fourth consecutive month.

Overall, inflation stopped decelerating in August. Consumer prices rose by 5.3% compared to the previous year, more than 2.5 times above the policymakers’ targeted objective, mainly due to energy costs. A core measure excluding volatile elements slowed down as expected, reaching the same level as the overall indicator. The core price indicator historically holds the most significance for ECB officials. This argues for a pause. The euro extended its losses, and bonds gained after the data was released as the central bank’s tightening cycle’s end came into view.

In any case, officials face a dilemma, and the upcoming ECB meeting promises to be turbulent.
The dilemma faced by officials was laid out on Thursday by a member of the ECB’s Executive Board. In comments that appeared to echo her Finnish colleague Tuomas Valimaki’s remarks earlier in the week, Isabelle Schnabel stated that the outcome was “completely open.” “If we judge that the policy stance is not consistent with a swift return of inflation to our 2% target, a further increase in interest rates would be justified,” Schnabel said. “If our assessment of monetary policy transmission suggests that the pace of disinflation is proceeding as desired, we could afford to wait for our next meeting.”