Eurozone inflation jumps to 3.8%, highest in three years

Inflation in the euro zone rose to 3.8% in September from 3.2% in August, Eurostat's flash estimate showed on Friday. That is the highest rate since September 2023 and above economists' forecasts. Higher energy costs tied to the Middle East conflict drove the increase, adding to pressure on the European Central Bank to raise interest rates again after it lifted them in June and September.cnbc+2

Economists polled by Reuters had expected 3.6%, and the median forecast in a Bloomberg survey was 3.7%. Core inflation, which leaves out volatile food and energy prices, rose to 2.5% from 2.4%, in line with expectations. Prices rose 0.6% from August. September was the seventh month in a row that inflation in the 21-country bloc stayed above the ECB's 2% target.irishtimes+4

Energy drives the jump

Energy prices were 18.8% higher than a year earlier, up from 14.3% in August. Services inflation rose to 3.2% from 3.0%, and food, alcohol and tobacco prices rose to 1.4% from 1.1%. Inflation for non-energy industrial goods eased to 1.1%. Spanish newspaper elDiario.es pointed to the closure of the Strait of Hormuz and lower-than-expected gas storage in Europe as factors behind higher energy prices. It also cited President Donald Trump's announcement that the US would ban diesel exports to Europe.investinglive+3

According to the Financial Times, inflation rose faster than expected in all four of the bloc's largest economies. Eurostat's harmonised measures showed Spain at 5%, Italy at 4.1%, France at 3.4% and Germany at 3.3%. Lithuania had the highest rate at 6.1%. Malta had the lowest at 2.4%.elespanol+1

A harder call for the ECB

The ECB's deposit rate is now 2.5% after a quarter-point increase on Sept. 10. The FT reported that traders expect another quarter-point rise to 2.75% by the end of the year. It also noted that ECB board member Isabel Schnabel said this week that policymakers must act pre-emptively to keep energy costs from spreading into broader prices and wages.elespanol+1

Reuters reported that markets expect up to three more hikes over the next year. Investors see little chance of a move this month, though, and have not fully priced in a hike until January. Officials who favor caution point to a weak labor market and a sharp rise in long-term borrowing costs.mezha+1

Bond markets add to the difficulty. The Wall Street Journal News Corp ↗ 0.64% reported that the recent jump in government bond yields could make the ECB hesitate before raising rates again. On Thursday, French 10-year yields hit 4.96%, their highest since 2002, as investors worried about the country's public finances.irishtimes+1

"The main question will continue to be whether the energy shock remains largely contained or starts feeding more meaningfully into core prices and services," wrote Justin Low of investingLive.investinglive