Euro zone inflation hits 4% three-year high, firming ECB December hike bets

Euro zone inflation accelerated to 4.0% in October, a three-year high, firming market bets on another European Central Bank rate hike in December even as underlying price pressures held steady.

Prices in the 21-country currency bloc rose from 3.8% in September, in line with expectations in a Reuters poll of economists, data from Eurostat showed Wednesday. The closely watched core measure, which strips out volatile food and energy prices, held at 2.5%, also matching forecasts.

The headline acceleration reflects an energy shock driven by the US war in Iran, which has pushed up costs in a region that imports the vast majority of its energy. The ECB has already raised rates twice this year to keep price-growth expectations in check and left its deposit rate unchanged at 2.5% last week. A long list of policymakers, including the influential heads of the German and Italian central banks, have signaled another move in December is now likely, with money markets pricing between two and three hikes over the coming year.

Under the hood, pressures are broadening. Services inflation, the single largest item in the consumer basket, picked up to 3.3% from 3.2%. Industrial goods prices rose 1.2% after 1.1%, and non-processed food inflation accelerated to 4.6% on the year.

Analysts said the data still confirm the energy surge has yet to generate hard-to-break second-round effects, but cautioned that this offers only limited comfort. Expensive diesel and natural gas seep into other goods and services quickly, and low natural gas storage levels create upside risk for heating costs. The pass-through may not show in October data but is likely to surface in coming months, especially in January, when some goods are traditionally repriced. The ECB expects inflation to hold above 4% for much of the first half of 2027 before falling quickly toward the "low twos" as high year-earlier figures drop out of the calculation.

National readings diverge

Wednesday's bloc-wide figure followed national data published October 30 for the four largest economies, which showed inflation accelerating sharply in Italy and France, steady in Spain and falling in Germany, according to euronews.

Italy recorded the highest rate at 5.4%, up from 4.2% in September and back to its August 2023 level, with energy prices up 31.4% year on year. Regulated energy tariffs jumped 59.5%, and the "shopping trolley" basket of everyday groceries accelerated to 2.5% from 1.5%, with unprocessed food prices up 7.5%. France saw inflation rise to 3.4% from 3.1%, its highest since January 2024, as energy costs accelerated for a fourth consecutive month. Spain held at 4.9%, near its highest level since early 2023, with cheaper fuel partly offset by higher gas tariffs. Germany was the outlier, inflation easing to 2.8% from 3.3% — below the 3% economists had forecast — helped by a fuel tax cut that took effect October 1 and runs through year-end.

The national data also exposed a growth divide, euronews reported. The French economy shrank 0.1% in the third quarter while Spain's grew 0.6%, supported by stronger domestic demand; Italy recorded no growth. Pantheon Macroeconomics' Melanie Debono said the Italian breakdown due next month is likely to show the energy shock weighed more heavily on consumer spending than monthly retail figures had suggested.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, described France's position as "stagflation" — rising prices combined with a stagnant economy — and expected French harmonised inflation to rise above 4% by November. He warned Germany's softer readings would prove short-lived, with energy inflation likely to snap back in January and February if fuel duties rise again. "The current German core inflation numbers look dovish, but this weakness won't last long," he said, as reported by euronews.

Rate path

The October outcome aligned with the most recent projections. Pantheon Macroeconomics raised its euro zone forecast to 4% after the Italian surprise — up from 3.