Bad newsEuro Area Inflation Hits 4% as Energy Costs Rise 20.8% and ECB Hike Looms
Eurostat's flash estimate puts euro area inflation at 4.0% in October, the highest in three years, with energy up 20.8% a year. Markets price a better than 70% chance of an ECB rate rise in December.
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Prices in the euro area rose 4.0% in the year to October, up from 3.8% in September. Eurostat’s flash estimate is the first reading at or above 4% since September 2023, according to CNBC. It matched what economists polled by Reuters had expected, so the surprise is the size of the trend, not the figure.
Energy is doing the damage. Eurostat puts energy at 20.8% a year in October, against 18.9% in September, and 10.8% back in May. Energy has the biggest weight in the rise but only 9% of the basket (90.3 parts in a thousand), so the rest of the basket has been moving more slowly. CNBC notes that Europe is a net energy importer and that prices have climbed steadily since the Iran war began.
Where it bites
Food, alcohol and tobacco rose 1.6%, from 1.3%, and unprocessed food alone rose 4.6%. Services, the biggest part of the basket, ran at 3.3%. Prices rose 0.4% in the month alone, and no country sits at the ECB’s 2% target.
The spread is wide. Lithuania has the highest rate at 6.1%, with Italy and Greece at 5.6%, Cyprus at 5.4% and Belgium at 5.2%. France reached 3.8% and Germany 2.8%, while Malta has the lowest at 2.3%.
What the central bank may do
The European Central Bank held its key rate at 2.5% in October after a quarter-point rise in September, CNBC reports. Before the release, markets priced a 71.8% chance of a rise at the ECB’s last meeting of the year in December, and that moved to more than 72% afterwards. Policymakers have described underlying inflation and wages as broadly stable.
Eurostat’s figures support that last point only partly. Inflation excluding energy was 2.3% in October, unchanged from September, and excluding energy, food, alcohol and tobacco it was 2.5%. A rate rise would therefore answer a price shock that comes mainly from fuel, and it would land on households and firms that borrow.
What is not known
Neither source gives an oil price forecast, and the flash estimate is provisional. Eurostat publishes full harmonised data for October on 18 November, and the next flash estimate is due on 1 December. Robert Mertens of Validus Risk Management told CNBC that turmoil in the French bond market is placing constraints on ECB policy.
