Euro Zone Braces for Higher Inflation as Energy Prices Surge

Europe is bracing for higher inflation as energy prices surge due to ongoing tensions in the Middle East. According to new data, inflation rates have increased across major euro zone economies, with some countries seeing jumps of over a percentage point.

In France, the harmonized inflation rate rose to 3.4% year-on-year in September, up from 2.6% in August, while Italy's inflation jumped to 4.1% from 3.2%. German inflation accelerated slightly more than expected in September, rising to 3.3% year-on-year from 2.9% the month before.

The European Central Bank (ECB) has already lifted interest rates twice this year and investors are predicting a further four rate hikes over the next year. The ECB's baseline scenario sees inflation at 4.0% in both the fourth quarter of this year and the first three months of 2027, but economists say current energy prices may align with its 'adverse' scenario.

J.P. Morgan economist Mariana Monteiro noted that energy inflation has surprised on the upside in all countries reporting so far, as has food inflation, albeit more modestly.