Core data shows that eurozone inflation climbed to 3.3% in August, driven higher by energy prices amid the Iran war, following readings of 2.9% in July and 2.8% in June. Market participants widely anticipate that the European Central Bank will deliver another 25 basis point rate increase after its hike in June to counter the inflationary pressure. However, economists caution that the ECB must carefully weigh the economic toll of higher borrowing costs on heavily indebted households and struggling small and medium-sized enterprises.

On August 4, 2026, in Naples, residents enjoyed the sun and sea amid an African heatwave. Rising energy costs pushed eurozone inflation back above 3% in August, potentially delivering a second wave of interest rate pain to businesses already under strain.

Preliminary estimates released by Eurostat on Tuesday revealed that headline inflation in the energy-import-dependent bloc accelerated to 3.3% from 2.9% in July, marking the highest level since September 2024. Energy inflation alone surged from 10.3% to 14.3%. In contrast, core inflation, which strips out volatile components such as energy, food, alcohol, and tobacco, eased slightly from 2.5% to 2.4%.

The Iran war and disrupted shipping through the Strait of Hormuz have pushed up prices for crude oil and refined products, while Europe also faces severe interruptions to natural gas supplies. According to data from the London Stock Exchange Group (LSEG), traders have fully priced in a rate increase at the ECB's September 10 policy meeting, with the probability of a 25 basis point move pushing the deposit rate to 2.5% standing at 98.9% in Tuesday morning trading.

In June, the ECB delivered its first rate hike since 2023, responding to global inflationary pressures stemming from the Iran conflict. Joe Nellis, economic research director at MHA, commented via email that the ECB must remain vigilant against short-term inflation pressures evolving into structural issues that spill over into wage growth and services inflation.

"The ECB finds itself in a dilemma, forced to choose between raising rates and absorbing the economic costs. Higher borrowing costs will persistently squeeze heavily indebted households, dampen the housing market, and raise the cost of corporate investment."

"For small and medium-sized businesses in particular, the renewed rise in financing costs could lead to investment plans being postponed indefinitely or even abandoned outright."