Euro zone inflation soars past forecasts to new record high

Euro zone inflation surged past expectations yet again this month to hit a record high, pointing to further interest rate hikes from the European Central Bank as price pressures appear to be broadening.

Consumer price growth in the 19 countries sharing the euro accelerated to 10.7 per cent in October from 9.9 per cent a month earlier, beating expectations in a Reuters poll for 10.2 per cent as inflation in Germany, Italy and France all rose more than forecast, data from Eurostat, showed on Monday.

Energy prices continued to drive inflation but food and imported industrial goods all pushed prices sharply higher even as services played only a marginal role this time.

Irish consumer prices, harmonised to compare with other EU member states, rose by 9.5 per cent on an annual basis in October, according to data published last week by the Central Statistics Office (CSO).

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This measure of inflation, based on the CSO’s harmonised index of consumer prices (HICP), is different from the agency’s consumer price index (CPI), which put the headline rate of inflation here at 8.2 per cent in September.

Inflation trend

Nonetheless, the HICP measure of price growth was up from 8.6 per cent in September, suggesting the inflation trend here may still be accelerating.

The main driver was energy prices. They are estimated to have increased by 13.6 per cent in October and by 47.6 per cent compared to a year ago. When energy prices are excluded, inflation was 5.9 per cent higher on an annual basis.

The ECB has raised rates a combined 200 basis points in the past three months and promised further tightening as soon as December. But markets have started to anticipate a slowdown in rate hikes as a recession looms and gas prices have come down from record highs.

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But policymakers are likely to be concerned that underlying price growth, which filters out volatile food and fuel prices, continued to accelerate, pointing to broadening price pressures, which raises the risk that high inflation will get entrenched.

Indeed, inflation excluding unprocessed food and energy accelerated to 6.4 per cent from 6 per cent, while an even narrower measure that also filters out alcohol and tobacco rose to 5 per cent from 4.8 per cent.

Markets priced out some rate hikes last week after ECB chief Christine Lagarde provided a sombre outlook for economic growth but a string of grim price data since then turned investor sentiment around at least partially.

Klaas Knot, the hawkish head of the Dutch central bank, also helped push expectations back up after he said that a lot more policy tightening is still needed and the December hike will be a choice between 50 and 75 basis points.

The ECB’s deposit rate, now at 1.5 per cent, is seen peaking at just below 2.9 per cent in 2023, a big jump compared with expectations of about 2.6 per cent after the ECB’s policy meeting last Thursday. But that is still below the 3.2 per cent markets had priced in only a few weeks ago.

Part of the change is that economists now expect the bloc to be in recession through the end of the first quarter of 2023 and such a downturn is likely to be naturally deflationary, making the ECB’s job easier.

Gas prices, though still high, are also well down from their late-summer peaks, raising hopes that Europe may find it easier to wean its economy off Russian gas than many had feared.

But the weak euro is adding to price pressures while wage growth is also inching up, a key worry as a wage-price spiral would make inflation even more difficult to break.

The ECB will next meet on December 15th, and a host of new readings on the economy plus the US Federal Reserve’s own guidance on policy, may guide its decision then more than Monday’s data. — Reuters

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