Headline consumer prices in the eurozone rose more quickly than expected in August as volatile energy prices exerted the most upward pressure, leaving underlying inflation looking a little flat.
Preliminary figures from Eurostat, the European Union's official statistics office, showed that the headline consumer price index (CPI) rose at an annual rate of 1.5% in August, after rising at 1.3% in July. Analysts had predicted a rise of 1.4%.
Volatile energy surges
The breakdown of the data showed that energy prices rose at an annual pace of 4% compared with 2.2% in July – by far the biggest contributor to the headline rate of inflation during the month.
Services followed, with an annual increase of 1.6%, which was same rate as the prior month, while food, alcohol and tobacco prices also remained stable at July's level of 1.4%.
Excluding the volatile elements of energy and food, alcohol and tobacco, the core rate of inflation remained stagnant at 1.3%.
While the European Central Bank focuses on the headline rate for meeting its 2% inflation target, Mario Draghi, ECB president has often favoured overlooking the volatility of energy prices in his assessment on the timing for policy tightening.
The policy setting board of the ECB next assemble on Thursday, 7 September and will be faced with the same dilemma, given these latest inflation figures.
Does the central bank look at the robust level of economic growth in the eurozone and start to withdraw stimulus, or look at benign inflation and leave policy at the current, highly accommodative settings?
Risks are inherent in either move. The ECB can tighten policy and risk stalling economic growth, or it can stay on hold and risk falling behind the inflationary curve, should price pressures suddenly start to increase.
One of the main factors holding back underlying inflation is the strong euro. Those countries on the weak side of the euro exchange rate are importing inflation from the eurozone.
Euro strength means that importers of goods exported from the eurozone are paying more due to the relative weakness of their domestic currencies.
"Given the risk that an overshoot of the euro exchange rate could push inflation back below 1.5%, caution remains warranted in removing monetary policy accommodation," said Peter Vanden Houte, economist at ING.
"We believe that the ECB will announce a 'dovish tapering' in October, giving the markets the impression that QE could be lengthened into the second half of next year, if need be."
The euro remained on the back foot against a resurgent dollar, falling 0.2% to $1.1862, but was higher against both sterling and the yen, rising 0.2% to €1.0855 versus the pound and 0.2% to Y131.20 on the Japanese currency.
European stock markets were broadly higher, with the pan-European EuroStoxx 50 up 0.7%, while the Xetra Dax in Germany was 0.6% higher and the CAC 40 in France added 0.6%.