Eurozone inflation reached 2 per cent in October, in line with the European Central Bank’s target and strengthening the argument for a smaller quarter-point rate cut in December. The annual figure from Eurostat, the EU’s statistics agency, slightly exceeded analysts’ expectations of 1.9 per cent.
Last month, the inflation rate was at 1.7 per cent, falling below the ECB’s target for the first time in over three years. The increase in consumer prices follows robust growth data for the third quarter released earlier this week.
These numbers challenge the case for a significant rate cut by the ECB, which some economists had started to anticipate due to signs of economic headwinds in the currency bloc. Following the inflation data, markets now predict an approximately 80 per cent chance of a quarter-point cut, compared to about 60 per cent before the growth figures were released. The ECB’s key deposit rate currently stands at 3.25 per cent.
Unemployment in the Eurozone remained stable in September at a record low of 6.3 per cent, according to Eurostat. “All of these data clearly support a more hawkish policy,” noted economist Tomasz Wieladek from T Rowe Price.
Christophe Boucher, chief investment officer at ABN Amro Investment Solutions, stated that the rise in inflation “strengthens the case for a gradual easing trajectory rather than aggressive measures.” The euro saw a slight increase following the announcement, climbing 0.1 per cent against the US dollar to $1.087.
The ECB had previously reduced borrowing costs by a quarter percentage point for the second consecutive month in October after inflation declined more rapidly than anticipated and concerns over weak economic conditions had escalated. Core inflation, which excludes volatile food and energy prices and is considered a more reliable indicator of underlying price pressures, remained steady at 2.7 per cent, surpassing analysts’ expectations by 0.1 percentage points. Services price inflation remained high at 3.9 per cent.
The ECB has projected that headline inflation figures in the final months of the year will increase, partly due to the impact of a temporary decrease in energy prices from a year ago. However, Ulrike Kastens, senior Europe economist at DWS, suggested that fourth-quarter inflation could be 0.3 percentage points lower than the ECB’s forecast of 2.6 per cent.
Additional reporting by Ian Smith in London