The ECB has an official target of getting inflation to just below 2 per cent.
Both figures came in stronger than expected, with a Reuters poll having pointed to an increase of 1.7 percent on the year and a rise of 0.1 percent on the month. This was the strongest rate since April. Likewise, services costs rose again by 1.6 percent. On the month, prices rose 0.2 percent. Processed food, alcohol and tobacco prices increased by 2%.
That would be slightly higher than the Reuters consensus forecast for euro zone inflation to accelerate to 1.4 percent.
The euro zone will publish preliminary inflation data for August on Thursday.
Underlying inflation, or prices excluding volatile food and energy costs, a figure closely watched by European Central Bank policymakers, held steady at 1.3 percent, beating forecasts for 1.2 percent.
“Inflation is pointing upward because the German economy is in full swing”, KfW bank chief economist Joerg Zeuner said, adding there was no end in sight to the upturn.
It could further relax a requirement to buy bonds in proportion to each country’s ECB shareholding, or include new asset classes such as stocks, as raised in July by one policymaker but not given consideration, or non-performing bank loans.
Regardless of the election results, an “Italian Euro Exit” was unlikely, “however, this won’t stop markets from fretting about a Euro break-up, which would hit European equities and the euro”, the report said.
While ECB stimulus has pushed euro zone growth to over 2 percent, the fastest since 2011, inflation is expected to undershoot the bank’s target at least through 2019.
Launched 2-1/2 years ago when the threat of deflation appeared real and imminent, the ECB’s 2.3 trillion euro bond purchase scheme is due to expire at the end of the year, and policymakers promised to decide this “autumn” whether to extend the purchases or wind them down.
The sources said no policy proposals had been made and the formal discussion within the ECB’s governing council would only begin next week as agreed at the July meeting.
“In all, the latest data seem to confirm that underlying inflation pressures have strengthened over recent months in parts of the euro zone”, McKeown said.
Germany and Northern Europe are ready to dial back monetary stimulus as their growth rates pick up, just as southern nations take on the added burden of uncompetitive exports on top of high unemployment.