Euro Zone Inflation Surges, Putting Pressure on ECB Rate Hikes

Euro zone inflation surged to 3.8% in September, exceeding expectations of 3.6%, driven primarily by fuel and natural gas costs. The rise in headline inflation is a cause for concern for the European Central Bank (ECB), which is under pressure to raise interest rates. However, the core figure, excluding volatile food and fuel prices, accelerated to 2.5% from 2.4%, indicating that high energy costs have yet to generate second-round impacts.

The recent surge in natural gas costs will feed into core prices more quickly than in the past, lifting everything from electricity and heating costs to business expenses. Policy hawks argue that energy costs have been too high for too long, so they are bound to start setting off second-round effects. On the other hand, some economists say that the labour market is relatively soft, which means workers can hardly demand big pay increases.

The ECB may be keen to stay on the sidelines for now and not add to the turbulence, especially since inflation trends do not require urgent or forceful action. Investors see up to three more hikes in the ECB's 2.5% deposit rate in the coming year, but the odds of a move this month are seen as negligible.