By Dhara Ranasinghe

LONDON (Reuters) – Germany’s borrowing costs rose to their highest level in over two months on Wednesday, and were set to end August with their biggest monthly surge in over 30 years, as data showed inflation in the euro area hitting another record high.

Bond markets across Europe have been battered this month as surging gas prices, fueled by concerns about supplies from Russia, exacerbated inflation fears and pushed up expectations for higher interest rates even as recession fears grow.

Euro zone inflation rose to another record high at 9.1% this month, beating expectations and solidifying the case for further big European Central Bank rate hikes.

Significantly, closely-watched underlying price growth, which filters out volatile food and energy prices, jumped to 5.5% from 5.1%.

“The most disappointing aspect of the inflation data is the core measure, where we have a bigger increase than in the headline measure,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

“Even though we will get more support measures to help ease the gas crisis, inflation will move higher unless policymakers can get a better grip on gas markets in the euro area.”

In a sign of the scale of the unease gripping investors, bond markets were set to end August with heavy price losses that have sent yields soaring.

In Germany, the euro zone’s benchmark bond issuer, two-year yields rose to their highest since mid-June at around 1.2% and were last up 3 basis points on the day.

They are up around 90 basis points for the month, set for its biggest monthly gain since 1981, according to Refinitiv data.

Germany’s 10-year bond yield was poised for its biggest monthly jump since 1990, up over 70 basis points. It rose to its highest in just over two months at around 1.55%.

French and Dutch 10-year bond yields were also set for the biggest monthly jump in decades. In Britain, also hit hard by soaring gas prices, 10-year bond yields were on track for their biggest monthly surge since the 1980s.

While gas prices have come off their peaks, they are still up 30% in August alone.

Russia meanwhile halted gas supplies via a major pipeline to Europe on Wednesday, intensifying an economic battle between Moscow and Brussels and raising the prospects of recession and energy rationing in some of the region’s richest countries.

“Front-end rates are very much dancing to the energy market’s tune and this is what propelled them higher in August,” said ING senior rates strategist Antoine Bouvet.

“Clearly the volatility in the gas and power markets is spilling over into bonds,” said Bouvet. “The ECB, by voicing fear of de-anchoring of inflation expectations, has effectively encouraged greater correlation between bonds and energy.”

The ECB meets next week and is expected to hike rates by at least half a percentage point.

(Reporting by Dhara Ranasinghe; Editing by Ana Nicolaci da Costa and Tomasz Janowski)