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

Euro zone inflation rose to 4.0% in October from 3.8% in September, the highest in three years, firming market expectations that the European Central Bank will raise rates again in December.

The flash estimate from Eurostat, the EU's statistics agency, matched the 4.0% forecast in a Reuters poll of economists. Core inflation, which strips out volatile food and energy prices, held steady at 2.5%, also in line with expectations.

Energy remains the principal driver. The US war in Iran has pushed up energy costs for the 21-nation currency bloc, which imports the vast majority of its energy, and those costs are feeding through to retail prices. The pressure is broadening: services inflation, the single largest item in the consumer price basket, picked up to 3.3% from 3.2%, while industrial goods prices rose 1.2% after 1.1% a month earlier. Food inflation continued to accelerate, with non-processed food prices up 4.6% year on year.

The figures suggest the energy shock has yet to generate the hard-to-break second-round effects that would show up in wages and broader prices. Analysts said that offers only limited comfort. Expensive diesel and natural gas seep into other goods and services quickly, causing indirect effects that are bound to linger, and low natural gas storage levels create upside risk for heating costs. The impact may not be visible in current data but is likely to emerge in the coming months, particularly in January, when many goods are traditionally repriced.

The ECB now 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 data.

The bank has raised rates twice this year to keep price-growth expectations from climbing in tandem with the energy shock. It left its deposit rate at 2.5% last week, after a hike in September, but a long list of policymakers — including the influential heads of the German and Italian central banks — have signalled that another move in December is now likely. Financial markets are pricing between two and three hikes to the deposit rate over the coming year, with expectations shifting frequently in tandem with oil prices.

**Uneven picture across the big four**

National data published ahead of the bloc-wide reading pointed in the same direction, according to euronews. Italy recorded the sharpest acceleration among the euro zone's four largest economies, with prices rising 5.4% in October from 4.2% in September — back to an August 2023 level and well above the 4.6% economists had expected. Under the harmonised measure used for cross-country comparison, Italian inflation reached 5.6%. Its statistics office, Istat, said energy prices jumped 31.4% from a year earlier, with regulated energy tariffs up 59.5%. Price pressure also reached supermarket shelves: unprocessed food inflation accelerated to 7.5%.

France's inflation rose to 3.4% from 3.1%, the highest since January 2024, even as the economy shrank 0.1% in the third quarter. Energy prices rose 24.1% year on year, accelerating for a fourth consecutive month, and services inflation picked up to 2.7%. "France faces stagflation," Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said in a report. He expects French harmonised inflation to rise above 4% by November.

Germany was the exception. Inflation there fell to 2.8% from 3.3%, below the 3% economists had forecast, after a fuel tax cut that took effect on 1 October and runs to the end of the year. Energy inflation slowed to 12.2% from 14.9%, and consumer prices fell 0.2% from September. Economists warned the relief may be short-lived; Vistesen wrote that energy inflation is likely to stay subdued through year-end but 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.

Spain's inflation rate held at 4.9%, near its highest level since early 2023, as cheaper fuel compared with a year earlier offset higher gas tariffs.

**Rate path and politics**

Before Wednesday's release, Pantheon Macroeconomics had raised its forecast for October euro zone inflation to 4% — twice the ECB's 2% target — following the Italian surprise, while BofA Global Research had expected 3.7%, euronews reported.

Paolo Grignani, senior economist at Oxford Economics, described the national data as "a mixed picture for the Eurozone with stagflationary tendencies," with "worrying signs of the energy shock spreading rapidly to stickier components." With euro zone growth holding at 0.4% in the third quarter, Oxford Economics expects the ECB to raise rates twice more. Separately, a ForexFactory briefing said the recent weakening of the labour market will limit pass-through to prices and stuck to a view that two more hikes will be enough.

The December decision will be made against an unsettled political backdrop. ECB President Christine Lagarde announced last week that she will step down in February, nine months before her term ends, after policymakers discussed another increase but agreed unanimously to wait. Matthew Ryan, head of market strategy at financial services firm Ebury, said a December hike remains "very much 'live'", and that a drawn-out search for Lagarde's successor "could inject volatility into markets at an already fragile moment."