Inflation in the 21-country euro area sped up to 3.8% in September, the hottest reading since September 2023 and a touch above forecasts. Core inflation, which strips out volatile categories such as energy, came in at 2.5%, while services rose 3.2%.
Price gains came in stronger than expected across the four biggest euro-area economies, with Spain touching 5%. The backdrop: Europe's latest inflation flare-up is arriving as the Iran war remains unresolved, pushing oil and natural gas costs higher again.
The ECB has already lifted borrowing costs twice, and the economy has proven sturdier than many feared. Still, public finances are strained, and a global bond selloff is making it harder for governments to cushion households and businesses. In response to public anger over pump prices, countries including Germany have cut fuel taxes. The ECB worries that such untargeted measures could aggravate the broader inflation problem instead of containing it.
Policymakers want to stop the energy shock from becoming entrenched via heftier wage demands and stickier selling prices. President Christine Lagarde signaled there's no rush to tighten again, arguing that higher market yields will cool growth and limit how much the energy shock spills into overall prices. Executive Board member Isabel Schnabel added that a "clearer picture" of inflation will take shape over the coming months.
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Traders are trimming bets on an October hike, but the ECB is still generally expected to raise rates at least twice more. Bloomberg Economics outlines a softer trajectory: in their view, the quarterly means for both headline and core match the ECB's latest projections, the uptick mainly reflects an airfare base effect, momentum in services inflation has eased, and soaring sovereign yields have tightened financial conditions further. Taken together, senior euro-area economist David Powell expects the Governing Council to hold off on any urgent October action and to "probably only hike one last time in December."
Meanwhile, a European Commission survey indicates that across all sectors, firms still anticipate charging more than is typical over the long run, and that consumers' expectations for inflation over the next 12 months increased "noticeably."
A hotter headline and firm services prices keep the door open to more tightening, even if the timing is getting fuzzier. That mix can influence what you pay on loans, how far bond yields climb, and how rate-sensitive corners of the economy feel from here. The tell to watch: whether the pressure looks temporary, tied to energy and a bump from airfares, or whether it spreads into wage growth and broader pricing power.
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