Euro area inflation held steady at 2.0 percent in August 2025, offering a picture of stability after July's similar reading and slightly below the 2.2 percent seen a year earlier. Services continued to dominate as the main driver, contributing 1.44 percentage points (pp), reflecting strong demand resilience in areas such as hospitality and transport. Food, alcohol, and tobacco added a further 0.62 pp, underscoring persistent household cost pressures.

By contrast, energy acted as a drag at minus 0.19 pp, a reminder of cooling commodity prices and easing supply shocks. Non-energy industrial goods contributed more modestly at 0.18 pp, signalling subdued price growth in manufactured products.

Regionally, headline inflation rose in Germany (2.1 percent after 1.8 percent), but fell in France (0.8 percent after 0.9 percent) and Italy (1.6 after 1.7 percent). However, inflation did not change in Spain (2.7 percent after 2.7 percent). Inflation rates in France and Italy remain below the European Central Bank's target, while Germany and Spain exceed it.

Overall, while the headline rate suggests stability, the composition reveals an inflation picture driven by the service costs, sticky food prices, and muted energy pressures, taking the RPI to minus 9, and the RPI-P to minus 25. This means that economic activities, adjusted for prices, are underperforming compared to the expectations of the Euro area economy.

Forecasters expect no revision in HICP from the flash at 2.1 percent and 2.3 percent for narrow core.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.