Euro zone inflation surges more than expected, keeping pressure on ECB to hike rates
TLT•Euro zone inflation rose to 3.8% in September from 3.2% in August, above the 3.6% expected, driven mainly by energy and food costs. Investors see up to three more increases in the ECB’s 2.5% deposit rate over the coming year.
1. Inflation accelerates
Inflation across the 21 euro zone nations rose to 3.8% in September from 3.2% a month earlier, exceeding expectations of 3.6%. Energy costs, including fuel and natural gas, were the main drivers, with food costs also contributing. Core inflation, excluding food and fuel, increased to 2.5% from 2.4%, reflecting a pickup in services prices.
2. Rate decision outlook
The rise in headline inflation above the ECB’s 2% target is likely to bolster calls for further rate increases, following two moves this summer. Investors see up to three more increases in the ECB’s 2.5% deposit rate in the coming year, though the odds of an October move are considered negligible. Jack Allen-Reynolds of Capital Economics said the data did not change his view that the ECB would most likely wait until December, while an October hike would not be a big surprise if energy prices rose further.
3. Budget and debt concerns
Higher fuel costs are prompting pressure on governments to support households and businesses, while subsidies so far have totalled around 0.1% of euro zone GDP. The spread between French and German debt yields has risen to multi-decade highs, raising debt sustainability questions. Some economists say the ECB may stay on the sidelines to avoid adding to financial market turbulence.
