Eurozone inflation figures see rise above forecasts for October

Inflation in the eurozone accelerated in October, with the consumer price index reaching 2% year-over-year, surpassing economist predictions of 1.9% and marking an uptick from 1.7% in September, according to flash estimates by Eurostat. 

Despite hovering at the ECB targets, the recent uptick in prices is rekindling questions about how inflation might impact the Bank’s monetary policies in the coming months. 

In a separate release, the Eurostat also revealed the unemployment rate within the euro area held at a record-low level of 6.3% in October.   

Eurozone inflation: Services continue to lead the increase

The main contributors to the inflation increase in October were services and food, with energy remaining in deflationary territory. Services registered the highest annual rate within the eurozone, at 3.9%, matching September’s level. Food, alcohol, and tobacco prices also saw a notable increase, rising by 2.9% from 2.4% in the prior month. Non-energy industrial goods prices grew modestly by 0.5%, while energy prices declined by 4.6%, though this marked a slightly less severe drop than September’s -6.1%.

Core inflation, which excludes the volatile food and energy sectors, held at 2.7% year-over-year, marginally above economists’ expectations of 2.6%. The monthly consumer basket inflation rate for October accelerated by 0.3%, marking the fastest increase since April.

Inflation accelerates across EU economies

The inflationary pressure was evident across the bloc’s major economies, including Germany, France, Spain, and Italy. 

In Germany, the annual inflation rate reached 2% in October, up from September’s three-and-a-half-year low of 1.6% and surpassing forecasts of 1.8%. This increase was primarily driven by a rise in service prices, which accelerated to 4% from 3.8%, and food prices, which rose to 2.3% from 1.6%.

Goods prices in Germany saw a recovery, moving from -0.3% to 0.4%, while energy prices declined by 5.5%, a milder drop than the 7.6% decrease recorded in September. The EU-harmonised inflation rate, often used for cross-country comparisons, reached 2.4% year-over-year, above the expected 2.1%, with the monthly rate rising to 0.4% from -0.1%.

France also saw a modest inflation increase, with the annual rate edging up to 1.2% from September’s 1.1%, which had been the lowest since March 2021. The French EU-harmonised inflation rate rose by 0.3% on the month and by 1.5% on the year, exceeding analyst predictions of 1.1%.

In Italy, the harmonised inflation rate accelerated by 0.3% month-over-month, reaching an annual rate of 1% in October, up from the previous 0.7%.

Elsewhere in the eurozone, the most significant monthly inflation gains were recorded in Croatia, Finland, and Estonia, each up 0.8%, followed closely by Belgium (+0.7%),

Slovakia (+0.7%), and the Netherlands(+0.6%). Annually, the highest inflation rates were observed in Belgium (+4.7%), Estonia (+4.5%), Croatia (+3.5%), and Slovakia (+3.5%).

What the inflation data means for ECB policy

The ECB may not be taken aback by October’s figures, since policymakers had anticipated a temporary increase in inflation during the final months of 2024. 

“It was no secret that inflation would rise towards the end of the year and, while the sudden uptick in food prices is surprising, it looks more like an anomaly to me. Services are still sticky, but the report remains in line with core inflation settling around the 2% mark at some point next year,” said Kyle Chapman, forex market analyst at Ballinger Group. 

In its October bulletin, the ECB reaffirmed its expectation of a near-term inflationary uptick before a gradual decline toward its 2% target in the course of next year.

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The ECB has noted that domestic inflation pressures remain high, driven by wage growth, which continues at an elevated pace. However, it anticipates a gradual easing in labour cost pressures, with corporate profits expected to absorb part of the cost increases, ultimately mitigating their impact on overall inflation.

During its latest meeting in October, the ECB reiterated its commitment to a “data-dependent and meeting-by-meeting” approach to future policy decisions.

With inflation still within target, the ECB may feel pressured to maintain its gradual approach to policy normalisation in its final meeting of the year. However, much will hinge on the outcome of November’s inflation report.

Market reactions: Euro and equities show mixed response

The euro edged up by 0.1% to $1.0870 on Thursday, marking its fourth consecutive day of gains and reaching a two-week high. Eurozone government bond yields remained largely unchanged.  The yield on the two-year German Schatz, a barometer for short-term interest rate expectations, held steady at 2.31%. 

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However, money markets are currently pricing in a 34-basis-point rate cut, down from 42 basis points the previous day, suggesting that the likelihood of a larger 0.5% cut is diminishing.

European equity markets experienced losses, with the Euro Stoxx 50 falling 0.9% and France’s CAC 40 and Italy’s FTSE Mib declining by 1% and 0.7%, respectively. 

BNP Paribas fell 5.6% following disappointing quarterly results, while Germany’s Rheinmetall and Zalando dropped by 3.2% and 3%, respectively.