Euro zone inflation surges, keeping pressure on ECB to hike
TLT•Euro zone inflation rose to 3.8% in September from 3.2% in August, above expectations for 3.6%, while core inflation edged up to 2.5% from 2.4%. Rising energy costs increased pressure on the European Central Bank to raise rates further.
1. Inflation rises
Inflation in the 21 nations sharing the euro rose to 3.8% in September, driven mainly by fuel and natural gas, and to a lesser extent by food. The core rate, which excludes food and fuel, increased to 2.5% from 2.4% as services prices picked up.
2. Rate outlook mixed
The higher headline rate could bolster calls for further increases after two rate hikes this summer, while the modest rise in core inflation suggests energy costs have not yet produced strong second-round effects. Investors see up to three more increases in the ECB’s 2.5% deposit rate over the coming year, but view a move this month as negligible and do not fully price the next increase until January.
3. Financial stability concerns
Some policymakers warn that sustained energy costs could feed into broader prices, while others point to a relatively soft labor market and higher borrowing costs as factors that may limit price growth. Economists say the ECB may stay on the sidelines to avoid adding to market turbulence, as investors demand a greater premium for riskier assets and the spread between French and German debt has risen to multi-decade highs.
