An oil price shock has driven inflation in the euro area sharply higher, raising concerns for the European Central Bank. Consumer prices rose by 3.8 percent in September compared with the same month of the previous year, reaching a three-year high, according to data published by the EU statistical office, which confirmed an earlier estimate. The inflation rate in the currency bloc is now nearly twice as high as the ECB's target value of 2.0 percent. In August, the rate stood at 3.2 percent. Energy prices proved to be the primary driver, increasing by 18.9 percent in September year on year and rising 4.0 percent compared to August.
Financial markets anticipate that the ECB will counter the price pressures, fueled by the Iran conflict, with another interest rate increase by the end of the year. Speaking on the sidelines of the IMF and World Bank annual meetings in Bangkok, Bundesbank President Joachim Nagel noted that the ECB has already raised key interest rates twice this year. Nagel, who is also an ECB Governing Council member, stated that if the situation remains as it is, he does not rule out the possibility of further action. Given a very volatile market environment, he added that deciding from meeting to meeting is the correct approach, making it crucial for monetary policy to address inflation with a steady hand and great flexibility.
Price increases were strongest in Lithuania, at 6.1 percent, and Bulgaria, at 5.6 percent, while rates in Germany at 3.3 percent and France at 3.4 percent remained below average. The ECB projects that headline inflation in the euro area will remain significantly above its target well into the first half of 2027, requiring policymakers to remain exceptionally vigilant. According to recently published minutes from the September meeting, monetary authorities assessed the risks to the inflation outlook as skewed to the upside. Financial markets expect the central bank to hold rates steady at its meeting at the end of the month before raising them further in December.
