Eurozone Inflation Surges to 3.8% as Energy Costs Fuel Concerns

European inflation surged to 3.8% in September, exceeding expectations and putting pressure on the European Central Bank (ECB) to raise interest rates. The jump from 3.2% in August was driven primarily by fuel and natural gas costs, with a minor contribution from food prices.

The 'core' inflation figure, which excludes volatile food and fuel prices, accelerated to 2.5% from 2.4%. This suggests that high energy costs have yet to generate the sort of second-round impacts that could set off a hard-to-break inflation spiral.

For the ECB, the figures are likely to be seen as a mixed bag. While the rise in headline inflation further above its 2% target is worrisome and will bolster calls for rate hikes, the muted increase in core figures indicates that the central bank can stick to its 'measured' policy response.

Investors expect 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. The next increase is not fully priced in until January, although this could change rapidly.