The inflation rate in the euro zone rose to its highest level in three years in October, driven by a rise in energy prices, amid expectations that it will continue to rise in the coming months, which may reinforce market bets on the European Central Bank raising interest rates again in December.
Data issued on Wednesday by the European Statistical Office (Eurostat) showed that inflation in the 21 member states of the euro zone rose to 4 percent in October, compared to 3.8 percent in September, in line with economists’ expectations in a Reuters poll.
In contrast, core inflation, which excludes more volatile food and energy prices, stabilized at 2.5 percent, also in line with expectations.
Inflation continues to rise at a rapid pace, exceeding the European Central Bank's target of 2 percent, in light of the rise in energy costs due to the US war on Iran, and the resulting increase in fuel prices, the effects of which were transmitted to retail prices in a region that relies heavily on energy imports.
Although the wave of price increases has not yet led to the emergence of secondary inflationary effects that are difficult to contain, the European Central Bank has raised interest rates twice since the beginning of the year, to prevent inflation expectations from rising in parallel with the price increase.
The bank kept interest rates unchanged last week, but a number of monetary policy makers, including the presidents of the German and Italian central banks, have already indicated the likelihood of raising them again in December.
Financial markets are currently pricing in between two and three increases in interest rates on deposits at the European Central Bank, currently standing at 2.5 percent, over the next year, amid a continuing change in expectations in parallel with oil price movements.
In terms of inflation components, the inflation rate in services, which represents the largest component in the consumer price basket, rose to 3.3 percent from 3.2 percent, while the prices of industrial goods rose to 1.2 percent from 1.1 percent. Food inflation also continued to accelerate, with unprocessed food prices rising by 4.6 percent year-on-year.
Analysts said Wednesday's data indicates that rising energy prices have not yet led to a second wave of inflationary pressures, but that provides only a limited amount of comfort to monetary policy makers.
They explained that the rise in energy prices, especially diesel and natural gas, is quickly reflected in the costs of other goods and services, creating indirect effects that are expected to last for a period. Low levels of natural gas inventories also increase the risk of rising heating costs.
Although these pressures may not appear clearly in the current data, they are likely to become clear in the coming months, especially in January, when the prices of a number of commodities are usually reviewed.
The European Central Bank currently expects inflation to remain above 4 percent during most of the first half of 2027, before quickly declining towards levels slightly above 2 percent, with the high readings recorded in the corresponding period of the previous year being excluded from annual inflation calculations.
The growth of economic activity in the euro zone slowed sharply during October, despite the economy continuing to expand, with demand, one of the most prominent indicators of economic momentum, approaching recession. This came in conjunction with rising costs and a decline in corporate confidence to its lowest levels in five months, according to a survey whose results showed data released on Wednesday.
The Standard & Poor's Global Composite Purchasing Managers' Index in the euro zone fell to 51.7 points in October, compared to 53.1 points in September, recording its lowest level in four months, and came below the initial reading of 51.9 points, according to Reuters.
Readings above 50 points indicate growth in economic activity, while levels below that reflect contraction.
Chris Williamson, chief economist at Standard & Poor's Global Market Intelligence, said that survey data indicate that the euro zone economy is growing at a rate of 0.3 percent, which is an acceptable level, but it lacks momentum at the beginning of the fourth quarter, after the strong performance it recorded during the third quarter.
Demand and production slowdown and employment declines
The data showed that the growth of new orders was marginal during October, a sharp decline compared to the previous three months, which witnessed stronger growth, while demand for services recorded a slight decline.
Although overall export orders rose for the third month in a row, their pace of growth slowed. The industrial and services sectors also expanded at slower rates, reflecting the widening scope of the economic slowdown.
At the labor market level, employment declined slightly, with service companies leading the decline, which partially offset the limited increase in the number of workers in the manufacturing sector.
High input costs and price pressures
On the price front, inflationary pressures intensified, with input price inflation rising to its highest level in five months. Companies also raised prices for their products and services at a strong pace, although slightly less than the pace of increase recorded in September.
Williamson said the additional price pressures that emerged during October were largely linked to higher energy prices, which is putting pressure on consumers' budgets and limiting their spending.
The European Central Bank kept interest rates unchanged last week, as expected, but economists polled by Reuters last month suggested that the bank would raise them again in December.
Business confidence declined for the third month in a row, remaining below its long-term average.
France: The services sector contracted at the fastest pace since May
French service sector activity declined in October at the fastest pace since May, with protests and social unrest contributing to a decline in domestic demand, according to a business survey released on Wednesday.
The Standard & Poor's Global index of business activity in the French services sector fell to 46.2 points in October, compared to 51.2 points in September, and was below the initial reading of 48.4 points.
The Composite Purchasing Managers' Index, which includes the services and industrial sectors, also fell to 46.6 points from 51.1 points, recording the fastest pace of contraction in activity since May, and it also came below the initial reading of 48.4 points.
Data issued last month by the National Institute of Statistics and Economic Studies in France showed consumer confidence falling to its lowest levels since June 2013, affected by demonstrations and protests.
Joe Hayes, chief economist at Standard & Poor's Global Market Intelligence, said that the data showed a faltering domestic demand and investment activity during October, with clients postponing their decisions.
He added that social unrest and the sharp rise in government bond yields led to a decline in activity levels and new business in the services sector at the fastest pace since May.
The growth of services in Germany has declined
In Germany, the services sector continued to expand for the second month in a row during October, but at a slower pace, in light of the decline in new business and weak demand, which negatively affected employment.
The PMI for business activity in the German services sector fell to 52.5 points, compared to 52.9 points in September, but remained above the 50 level that separates growth from contraction.
Phil Smith, associate director of economics at Standard & Poor's Global Market Intelligence, said that the services sector's recovery faced an obstacle during October, with the latest survey data indicating a loss of momentum, with companies recording a slight decline in demand.
The composite production index, which collects data for the services and industrial sectors, also fell to 53.4 points, compared to the highest level in 11 months recorded in September at 53.8 points.
Overall new business in the services sector fell after rising throughout the third quarter, as companies cited customers delaying decisions and pressures on household budgets. New export orders also fell for the first time in three months, and at the fastest pace since June.
In terms of employment, companies recorded a decline in the number of employees for the first time since July, albeit in a limited manner, bringing the pace of job losses to its fastest levels since April.
On the other hand, cost pressures decreased for the first time in four months, after the reintroduction of fuel discounts. Companies also raised their service prices at a slower pace compared to September, although input cost inflation and selling prices remained at historically high levels.
Businesses' expectations for activity over the next 12 months improved to their highest levels since February, with 34 per cent of businesses expecting activity to rise.
The growth of services in Italy has accelerated
In Italy, growth in the services sector accelerated during October, according to the survey, but cost pressures intensified further, driven by tensions in the Middle East.
The Purchasing Managers' Index for the services sector rose to 52 points in October, compared to 51.7 points in September, recording the fifth consecutive month above the 50 point level that separates growth from contraction. It also exceeded the expectations of 11 analysts polled by Reuters, which amounted to 51.5 points.
The employment index recorded 50.8 points, compared to 50.5 points in September, continuing job growth for the twenty-first month in a row.
The new business sub-index also rose to 53.5 points, compared to 52.8 points in September, recording an expansion for the fifth month in a row.
On the other hand, the index of prices imposed by companies rose to 55.9 points, compared to 54.8 points, recording the highest reading since February 2023. The input price index also jumped to 68.4 points from 65.4 points, recording the highest level since December 2022.
The annual inflation rate in Italy rose to 5.6 percent during October, according to data released last week, while the economy recorded zero growth during the third quarter.
A separate Standard & Poor's Global survey of the Italian manufacturing sector, which includes smaller companies, showed an unexpected contraction during October.
Italy's Composite Purchasing Managers' Index, which combines the industrial and services sectors, fell slightly to 50.8 points in October, compared to 51 points in September, indicating continued expansion for the seventh month in a row, but it recorded the lowest level since June.
