Eurozone inflation hits three-year high as energy costs fuel price surge

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Eurozone inflation reaches 4%

Highlights

Eurozone inflation rose to 4% in October, twice the ECB target.
Core inflation held at 2.5%, while services inflation reached 3.3%.
Markets expect another ECB rate increase in December.

Consumer prices across the 21-country currency bloc rose 4% from a year earlier, compared with 3.8% in September, according to Eurostat data. The reading matched economists' forecasts, while core inflation, which excludes volatile components including energy, remained at 2.5%, Bloomberg reports. Service inflation increased slightly to 3.3%.

Energy costs push inflation to a three-year high

The October reading was the highest since September 2023, reflecting the continued impact of higher energy prices following the outbreak of the U.S.-Iran war in February. The resulting shock has lifted household costs across Europe, although broader inflation measures have shown considerably less acceleration.

The gap between headline and core inflation is particularly important for monetary policy. While energy prices have driven the latest increase, underlying price pressures remain relatively contained, suggesting that companies have not yet passed the full-cost shock through to other goods and services.

ECB officials remain concerned that prolonged energy inflation could eventually influence wage negotiations and corporate pricing decisions. Internal wage indicators currently suggest slower pay growth in 2027, offering some reassurance that inflation may ease without an extended period of aggressive monetary tightening.

ECB officials signal another increase in December

The ECB held its deposit rate at 2.5% in October after two increases earlier this year. However, policymakers have indicated that the pause should not be interpreted as the end of the tightening cycle.

ECB President Christine Lagarde has maintained that the central bank must respond if inflation risks persist. Bundesbank President Joachim Nagel has also indicated that another increase in December may be necessary unless the inflation outlook improves.

Financial markets expect the next policy move at the December meeting, when updated economic projections will provide a clearer assessment of growth and inflation. Investors anticipate that the deposit rate could reach 3% or higher during 2027, although some economists believe the ECB may be approaching the end of its rate increases.

Higher borrowing costs test Eurozone resilience

The Eurozone economy has so far proved more resilient than expected despite higher energy prices, U.S. tariffs, and political uncertainty in France. Third-quarter economic growth exceeded forecasts, giving policymakers some room to address inflation without immediately threatening a downturn.

Nevertheless, additional tightening would increase financing costs for households and businesses already facing elevated energy bills. Rising global bond yields and relatively low natural gas inventories ahead of winter could add further pressure.

The ECB's December decision will therefore depend on whether energy inflation begins spreading into wages and services. With core inflation holding at 2.5%, policymakers must balance the risk of persistent price increases against the possibility that higher rates could unnecessarily weaken economic growth.

Earlier, we reported that Eurozone manufacturing growth eases in October as cost pressures build.

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