Euro Zone Inflation Jumps as Energy Costs Surge, ECB Faces Rate Pressure
Surging Inflation and ECB Policy Response
By Maria Martinez and Balazs Koranyi
Energy Price Shock Drives Inflation Higher
BERLIN, Sept 30 (Reuters) - Inflation rose far quicker than expected in some of the euro zone's biggest economies this month due to the energy-price shock of the Iran war, increasing pressure on the European Central Bank to raise interest rates again.
The ECB has lifted rates twice this year to prevent rapid price growth from getting embedded, and investors have sharply raised rate hike bets in the past few weeks as natural gas, petrol and diesel prices have all soared.
Country-Specific Inflation Data
France's harmonized inflation rate was 3.4% year-on-year in September, up from 2.6% in August, while in Italy it jumped to 4.1% from August's 3.2%, all above the ECB's 2% target, data showed on Wednesday.
In Germany, inflation rose sharply in five key German states in September, suggesting Germany's national inflation rate —which will be released later on Wednesday — could increase this month.
In Spain, the inflation rate rose to 5.0% in September from 4.6% in August, data showed on Tuesday.
Energy and Food Inflation Surprises
Energy inflation appears to have surprised on the upside in all countries that have reported so far, and food inflation has also surprised on the upside, although much more modestly, said Mariana Monteiro from J.P. Morgan.
The national data comes ahead of the euro zone inflation release on Friday. Inflation in the bloc is expected to come in at 3.6% in September, up from 3.2% in the previous month, according to economists polled by Reuters.
ECB Faces Mounting Pressure
Higher Than the ECB Expected
HIGHER THAN THE ECB EXPECTED
The ECB had expected inflation to accelerate from 3.3% in the third quarter to 3.6% in the final three months of the year, but economists say the actual peak is likely to be closer to 4%, given sky-high energy costs.
Markets therefore expect another four interest rate hikes over the next year, on top of two moves already made this past summer.
Energy Market Uncertainty
"With very few signs of a resolution of tensions in the Middle East on the horizon and winter approaching, a correction in energy prices is unlikely any time soon," Rory Fennessy, senior European economist at Oxford Economics, said.
Under its "adverse" scenario, the ECB sees inflation at 4.0% in both the fourth quarter of this year and the first three months of 2027, and economists say current energy prices are more closely aligned with this scenario than its baseline.
Currency Impact and Policy Outlook
Furthermore, the dollar's recent strength will exacerbate Europe's inflation troubles, as key commodities are priced in dollars and the exchange-rate impact makes energy even more expensive in local currencies.
Because this year's inflation surge has yet to generate dangerous second-round effects across the euro zone, a moderate policy response from the European Central Bank remains appropriate, ECB chief Christine Lagarde said on Monday.
Core Inflation and Future Risks
Although core inflation has not yet moved up notably this year, the renewed spike in energy prices means core inflation could rise into early 2027, Fennessy warned.
(Reporting by Maria Martinez and Balazs Koranyi; Editing by Andrew Heavens)
