Euro Zone Inflation Surges on Energy Costs, Prompting Further ECB Rate Hikes
The European Central Bank is facing increasing pressure to raise interest rates again as inflation in the euro zone accelerates. Energy costs linked to the Iran war are driving up consumer prices, with France's harmonized inflation rate reaching 3.4% in September, up from 2.6% in August.
Similar upside surprises were seen in Italy and Spain, where inflation rates jumped to 4.1% and 5.0%, respectively. Markets now price in four additional ECB rate hikes over the next year as energy and food inflation exceed expectations across several euro zone economies.
Rory Fennessy, senior European economist at Oxford Economics, warns that a correction in energy prices looks unlikely soon because tensions in the Middle East show few signs of easing and winter is approaching. A stronger dollar is also adding to Europe's inflation strain because key commodities are priced in the U.S. currency, making imports more expensive in local terms.
The ECB's adverse scenario projects inflation at 4.0% in both Q4 2023 and Q1 2027 due to elevated energy costs and currency pressures.