Euro zone inflation rose to 3.8% in September, exceeding forecasts and intensifying pressure on the ECB to raise interest rates.
Inflation across the euro zone accelerated more than expected in September, driven largely by soaring energy costs and increasing pressure on the European Central Bank (ECB) to raise interest rates.
Inflation in the 21 countries using the euro rose to 3.8% in September, up from 3.2% in August and above the 3.6%forecast by economists in a Reuters poll, according to data from Eurostat, the European Union’s statistics agency.
The increase was driven primarily by higher fuel and natural gas prices, with food costs also contributing. The rise in energy prices is expected to keep inflation elevated in the coming months, putting pressure on governments to support households and businesses facing higher costs.
Underlying price pressures also increased, although at a slower pace. Core inflation, which excludes volatile food and energy prices and is closely monitored by the ECB, rose to 2.5% from 2.4%, reflecting higher services prices.
Higher energy costs have already prompted governments to consider measures to cushion consumers and businesses. In some countries, including France, the increase has contributed to protests, while government support measures have added pressure to already strained public finances.
For the ECB, the latest figures present a mixed picture. The rise in headline inflation further above its 2% target could strengthen arguments for additional interest-rate increases, following two rate hikes during the summer.
However, the relatively modest increase in core inflation suggests that higher energy costs have yet to trigger significant second-round effects, such as sustained increases in wages and broader prices.
Jack Allen-Reynolds of Capital Economics said the September data did not change his expectation that the ECB would most likely wait until December before raising interest rates again. However, he said an October increase would not be a major surprise if energy prices continued to rise.
Financial markets currently expect as many as three further increases in the ECB’s 2.5% deposit rate over the coming year, although an October hike is considered unlikely and the next increase is not fully priced in until January.
ECB policymakers also face concerns over rising borrowing costs and financial stability. Longer-term yields have increased sharply, while the spread between French and German government bonds has widened to multi-decade highs, raising concerns about debt sustainability.
Economists therefore expect the ECB to weigh financial stability alongside inflation as it considers its next move, particularly as the latest underlying inflation data do not yet point to an urgent need for aggressive tightening.
