Μake us preferred on Google The rise in inflation to its highest level in three years makes a new ECB interest rate hike in December more likely.
According to data published by Eurostat on Wednesday, inflation in the 21 countries that use the euro rose to 4% in October from 3.8% the previous month, in line with economists’ forecasts in a Reuters poll, with energy inflation reaching 20%.
At the same time, core inflation, which excludes volatile food and energy prices, remained unchanged at 2.5%, in line with forecasts. This suggests that second-round effects, which have been a concern for some time, have not yet materialized.
“Despite the lack of evidence of second-round effects, today’s inflation data further strengthens the case for an ECB rate hike in December. The central bank is concerned that the longer the energy shock lasts, the greater the risk that broader inflationary pressures become entrenched,” Nicola Nobile of Oxford Economics told Reuters.
This year, inflation has quickly risen above the ECB’s 2% target, as the US conflict with Iran drove up energy costs. This is being passed on to retail prices, affecting an economic area that imports the vast majority of the energy it consumes.
Monetary Policy
The ECB kept interest rates unchanged last week. However, members of the central bank’s Governing Council, including the influential heads of the central banks of Germany and Italy, have already signaled that a new move in December is now considered likely.
Financial markets are pricing in two to three hikes to the ECB’s deposit rate (currently at 2.5%) over the next year, with expectations shifting frequently in line with oil prices.
Meanwhile, Sweden’s central bank followed the example of other central banks on Wednesday, tightening monetary policy and signaling further hikes amid fears that energy inflation could spread to the wider economy.
The Bank of England, which meets on Thursday, is expected to move in the same direction, raising its key interest rate to 4.00%, as it also forecasts that inflation will exceed 4% early next year.
Concern Over Food Prices
In a development that may worry the ECB, food inflation continued to accelerate, with unprocessed food prices rising 4.6% compared with the previous year.
This item makes up only a small part of the consumer price basket, but it includes some of the products households buy most often. According to economists, rapid price changes could have a disproportionately large effect on inflation expectations.
Services inflation, the largest component of the consumer price basket, rose to 3.3% from 3.2%, while industrial goods prices increased by 1.2%, compared with 1.1% the previous month.
Although Wednesday’s data shows that energy inflation is not yet causing second-round effects, the high cost of diesel and natural gas risks being passed on to the prices of other goods and services, causing indirect effects that are expected to last.
At the same time, low natural gas storage levels create a significant risk of further increases in heating costs, economists note.
This may not yet be visible in the current data, but it will likely show up in the coming months, especially in January, when the prices of certain goods are traditionally adjusted.
The ECB now expects inflation to remain above 4% for most of the first half of 2027, before falling quickly to levels just above 2%, as the high figures from the same period of the previous year drop out of the data.
