Eurozone inflation tops estimates to hit three-year high

It bolsters expectations that the European Central Bank will lift interest rates further

President Christine Lagarde suggested there’s no rush to tighten monetary policy further.

Euro-area inflation quickened more than expected to the highest in three years, bolstering expectations that the European Central Bank will lift interest rates further.

Consumer prices rose 3.8% from a year ago in September, up from 3.2% the previous month, Eurostat said on Friday. That’s the highest since September 2023 and slightly above the 3.7% median estimate in a Bloomberg survey.

Core inflation — excluding volatile items like energy, which has driven the latest bout of price pressure — rose to 2.5% as anticipated. The services gauge advanced to 3.2%.

Europe is in the midst of a renewed inflation upswing as the failure to end the Iran war jolts oil and natural gas markets higher again. Prices jumped more than anticipated in each of the euro area’s four largest members, reaching as high as 5% in Spain.

The 21-nation economy has held up well, particularly after the ECB hiked borrowing costs twice. But governments, whose finances were already stretched, are struggling to support households and firms amid a global bond sell-off.

ECB officials want to prevent the energy shock from becoming embedded in the economy through things like big wage demands and higher company selling prices. They’re expected to raise interest rates at least twice more, though bets on a move this month are fading.

President Christine Lagarde kicked off remarks from key policymakers this week suggesting there’s no rush to tighten monetary policy further, saying higher yields will curb economic expansion and limit the transfer of the energy shock to broader prices.

Executive board member Isabel Schnabel struck a similar note by saying a “clearer picture” of the inflation picture will emerge over the coming months.

Despite its resilience to date, doubts are building over the economy’s ability to withstand the latest onslaught in prices. Spurred by rising public outrage, countries like Germany have cut fuel taxes to ease soaring prices at the pump. 

The ECB worries, however, that such untargeted measures could make the overall inflation problem even worse.

There are other signs, too, that worse is to come. A monthly poll by the European Commission found firms’ selling-price expectations held above long-term averages in all sectors, while consumers’ inflation expectations for the next 12 months rose "noticeably".