FRANKFURT, Nov 4 (Reuters) – Euro zone inflation rose to a three-year high last month on expensive energy and was set to rise further in the coming months, likely firming up market bets for another European Central Bank rate hike in December.
Inflation in the 21 nations sharing the euro currency rose to 4.0% in October from 3.8% a month earlier, in line with expectations for 4.0% in a Reuters poll of economists, data from Eurostat, the EU’s statistics agency, showed on Wednesday.
A more closely watched ‘core’ figure, which strips out volatile food and energy prices, meanwhile held steady at 2.5%, in line with expectations.
Inflation has been climbing quickly above the ECB’s 2% target this year as the US war in Iran has pushed energy costs higher, feeding through to retail prices for a bloc that imports the vast majority of its energy.
While this surge has yet to generate hard-to-break second-round effects, the ECB has already raised interest rates twice this year to prevent price growth expectations from rising in tandem.
The bank left rates unchanged last week but a long list of policymakers, including the influential heads of the German and Italian central banks, have already signalled that another move in December is now likely.
Financial markets are pricing between two and three rate hikes to the ECB’s 2.5% deposit rate over the coming year, with expectations frequently shifting, in tandem with oil prices.
Services inflation, the single largest item in the consumer price basket, picked up to 3.3% from 3.2% while industrial goods prices rose 1.2% after 1.1% a month earlier. Food inflation continued to accelerate with non processed food prices rising 4.6% compared to a year earlier.
Wednesday’s figures appear to confirm that energy inflation is still not generating second-round effects, but this is likely to offer only limited comfort to policymakers, analysts said.
Expensive energy, especially diesel and natural gas, seeps into the price of other goods and services quickly, causing indirect effects that are bound to linger.
Low natural gas storage levels meanwhile create plenty of upside risk for heating costs, economists say.
This may not be so visible in data now but will likely show up in the coming months, especially in January, when some goods are traditionally repriced.
The ECB now expects inflation to hold above 4% for much of the first half of 2027 before falling quickly towards the ‘low twos,’ when high year-earlier figures get knocked from data.
(Reporting by Balazs Koranyi)
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