Eurozone inflation hits 4% for first time in three years. Will the ECB raise rates?

Inflation in the euro zone accelerated to 4% year over year in October from 3.8% in September, according to a preliminary estimate released Wednesday by Eurostat. The reading matched the consensus forecast of economists polled by Reuters. It was the first time inflation reached 4% since September 2023, when it came in at 4.3%. 

Surging energy prices accounted for much of the acceleration, with energy inflation accelerating to 20.8% from 18.9% in September, Eurostat reported. Unprocessed food prices added to the pressure, rising 4.6% year over year. Core inflation, which strips out volatile food and energy prices, held steady at 2.5%. Europe is a net energy importer, which leaves it exposed to external shocks, and prices have risen steadily since the U.S. war with Iran began in late February, the Eurostat reading noted. 

Inflation varied widely across the 21 economies of the euro zone, from a high of 6.1% in Lithuania to a low of 2.3% in Malta. The divergence was also evident among the bloc’s largest economies. Inflation jumped to 5.6% from 4.2% in Italy, while Germany, the euro zone’s largest economy, bucked the broader trend, with inflation slowing to 2.8% from 3.3%. Inflation remained above the European Central Bank’s 2% target in every member country. 

The inflation print has focused attention on whether the ECB will raise interest rates again at its final meeting of the year, CNBC reports.

“Despite the lack of signs of second-round effects, today's inflation print adds to the already strong case for an ECB rate hike in December, as the central bank is concerned that the longer the energy shock goes on, the higher the risks of broader inflationary pressures becoming more entrenched,” Oxford Economics economist Nicola Nobile told Reuters.

Last month, the European Central Bank held its key deposit rate at 2.5% after raising it by 25 basis points in September. Money markets were pricing in a 71.8% chance of a rate hike at the December meeting shortly before Wednesday’s inflation print. Those odds inched up to over 72% after the numbers came out, according to CNBC.