Key Takeaways
- Headline and core inflation are forecast to be higher than in July.
- Inflation is seen hovering around the ECB’s 2% target for the remainder of 2025.
- Experts and swap markets indicate an ECB rate cut in September is unlikely.
Preliminary eurozone inflation data for August will be released by Eurostat on Sept. 2.
Headline inflation is forecast to be 2.1% higher than in August 2024, according to FactSet consensus estimates, a slight uptick from July’s reading of 2% year over year. Core inflation, which excludes volatile components such as energy and food costs, is expected to be 2.5% higher year on year in August, above July’s reading of 2.3%.
“The hard yards in cutting rates are done, and with a trade agreement now in place with the US, the risk of inflation spiking again is low,” says Michael Field, chief European markets strategist at Morningstar.
The expected uptick in core inflation data to 2.5% is “a minor disappointment” as it moves further away from the headline measure, he adds. “That said, it is still within a reasonable range of the central bank’s targeted level, so is not of massive concern yet.” The European Central Bank “may at least be able to outline the likely timing of future incremental cuts,” according to Field.
In July 2025, services inflation remained the main driver of headline inflation, or HICP, with a contribution of 1.46 percentage points. The contribution of food, alcohol and tobacco stood at 0.63 percentage points, and the contribution of energy at -0.23 percentage points. Nonenergy industrial goods provided a 0.18 percentage point boost.
Will Eurozone Inflation Rise or Fall in 2025?
“Nonenergy industrial goods remain the most interesting component: With the stronger euro, we should actually be seeing more price easing,” says Ulrike Kastens, senior economist at DWS. This is already being observed in a few eurozone countries. “Companies have used the euro’s appreciation against the US dollar to defend margins. They’re buying more cheaply and could pass this on but are holding their margins.”
She expects headline inflation to hover around the ECB’s 2% target for the rest of 2025.
“We do not expect any shocks over the remainder of the year. The rate could temporarily fall below 2%, which will mainly depend on energy prices,” Kastens says.
She also notes that the ECB Wage Tracker indicates that wage growth will drop below 3% in Q1 2026. “That would help pull down services inflation, given the sector’s labor intensity.”
Will The ECB Cut Interest Rates in September?
“Markets have increasingly priced out the likelihood of another ECB rate cut, signaling a potential end to the current easing cycle,” according to ING strategists. This comes after a period of lower bond yields in the eurozone, in tandem with falling ECB interest rates. “European government bonds have benefited significantly from the ECB’s easing of monetary policy,”
ING notes that elevated sovereign bond yields reflect heightened scrutiny on countries such as France, which face fiscal challenges. But according to the bank’s foreign-exchange experts, the developments do not pose a major risk for the euro at present.
While the renewed debt concerns will keep markets on edge, the ECB is unlikely to intervene in the sovereign bond market, DWS‘s Kastens adds. “ECB intervention faces a very high bar. Monetary policy is not set for individual countries, and France’s situation is a domestic one,“ she says.
She also expects the ECB to hold rates at its next meeting on Sept. 11 and says the bank correctly sees itself in neutral interest rate territory. The ECB’s governing council will likely reiterate its meeting-by-meeting, data-dependent approach. A quarter-point cut later in 2025 remains DWS’s base case if the eurozone economy softens.
As of Aug. 29, markets are pricing in roughly one basis point of additional ECB easing in September and nine basis points by the end of 2025. In other words, the swap market is leaning toward a pause in September, with only a small probability attached to another move later in the year.
