France's harmonized inflation rate jumped to 3.4% year-on-year in September, Italy's to 4.1% and Spain's to 5.0%, all pulled higher by an energy-price shock tied to the Iran war. The readings raise pressure on the European Central Bank to raise interest rates again, with markets now pricing four more hikes over the next year.
Inflation rose far quicker than expected across several of the euro zone's biggest economies this month, and the European Central Bank is coming under pressure to raise interest rates again. The bank has already lifted rates twice this year to keep price growth from becoming entrenched, and investors have sharply raised their rate-hike bets over the past few weeks as natural gas, petrol and diesel prices have all soared.
National readings surprise to the upside
France's harmonized inflation rate hit 3.4% year-on-year in September, up from 2.6% in August. In Italy, it jumped to 4.1% from August's 3.2%. Both readings sit above the ECB's 2% target. In Spain, the inflation rate rose to 5.0% in September from 4.6% in August, while inflation also rose sharply in five key German states in September, suggesting Germany's national rate could increase too.
Energy inflation appears to have surprised on the upside in every country that has reported so far, and food inflation has also surprised on the upside, though much more modestly, according to J.P. Morgan's Mariana Monteiro. The national figures come ahead of Friday's euro zone inflation release, which economists polled by Reuters expect at 3.6% in September, up from 3.2% in August.
Markets now price four more hikes
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 now say the actual peak is likely to land closer to 4%, given sky-high energy costs. As a result, markets expect four more interest rate hikes over the next year, on top of the two moves already made this summer.
According to Rory Fennessy, senior European economist at Oxford Economics: "a correction in energy prices is unlikely any time soon". 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 align more closely with that scenario than with the baseline. The dollar's recent strength will also worsen Europe's inflation troubles, since key commodities are priced in dollars and the exchange-rate impact makes energy even more expensive in local currencies.
Lagarde holds to a moderate stance
Because this year's inflation surge has yet to generate dangerous second-round effects across the euro zone, a moderate policy response from the ECB remains appropriate, ECB chief Christine Lagarde said on Monday. Core inflation has not yet moved up notably this year, but Fennessy warned that the renewed spike in energy prices means core inflation could rise into early 2027.
Source: Investing.com
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