Eurozone inflation accelerated to twice the European Central Bank's target, providing grounds for further interest rate increases.
According to Eurostat's Wednesday release, consumer prices rose 4% year-on-year in October, up from 3.8% the previous month. This marks the highest level since September 2023 and matches the median estimate from surveys. Core inflation, which excludes energy—the primary driver of price pressures in this cycle—held steady at the expected 2.5%, while the services gauge edged up to 3.3%.
The eurozone inflation rate now stands at double the ECB's target. Although the central bank kept borrowing costs unchanged last month, officials have signaled they are prepared to raise rates for the third time since the Iran war erupted if the price outlook does not improve. President Christine Lagarde has stated the policy direction is "clear and unambiguous," and several Governing Council members said this week that October's decision to hold steady does not mean monetary tightening has ended. Bundesbank President Joachim Nagel went further, indicating that another rate hike will likely be needed next month if the inflation situation does not improve.
Investors and analysts expect the ECB to act in December, when the latest quarterly projections will provide a more comprehensive picture of the health of the 21-nation eurozone economy. The former anticipates the deposit rate will rise from the current 2.5% to 3% or higher next year. David Powell, senior eurozone economist, said: "Although eurozone inflation surged to 4% in October, the broader conclusion of this report is that the energy shock has persisted for more than six months, while underlying price pressures remain moderate." He added that the ECB emphasized at its October meeting the limited pass-through of energy price increases to core inflation, which further reinforces the view that the Governing Council is approaching the end of its rate hike cycle after a final increase in December.
So far, inflation remains confined to the energy sector. But the ECB is staying vigilant, aiming to prevent the shock from spreading through significant wage increases and corporate selling prices. Its internal wage dynamics tracker shows that wage growth will slow substantially by 2027.
The key question is how much tightening the 21-nation economy can withstand. It has so far weathered the impact of the Middle East conflict well and had previously withstood Trump's tariffs. In the third quarter, the economy overcame France's fiscal and political challenges to exceed growth expectations. However, another ECB rate hike would push rates to the top of a range considered economically neutral. Other headwinds include rising global bond yields and low natural gas storage levels at the start of winter.
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