Energy Costs in Europe Pushed Inflation Above Expectations

Energy costs, which peaked due to the Iran war, pushed inflation above expectations in Europe's leading economies in September.

While the slowdown in crude oil and processed fuel shipments from the Gulf region accelerated price increases in Germany, France, Italy and Spain, it also strengthened the markets' expectations for a new interest rate increase from the European Central Bank (ECB).

Diesel prices in Germany, France and Italy have reached record levels in recent weeks.

The simultaneous increase in natural gas and gasoline prices increased the energy bill again across the continent.

The strengthening US dollar in global markets has weakened the purchasing power of the European currency since commodity prices are determined in dollars, making energy imports even more expensive.

According to leading data from the German Federal Statistical Office (Destatis), annual inflation in Europe's largest economy rose to 3.3 percent in September, reaching its highest level since December 2023.

Consumer prices increased by 2.9 percent in the previous month.

According to the AFP agency, the French National Institute of Statistics and Economic Research (Insee) reported that consumer prices in the country increased by 3 percent on an annual basis in September.

This rate, recorded as 2.4 percent in August, marked the fastest increase since February 2024.

France's EU-compliant annual inflation increased from 2.6 percent in August to 3.4 percent in September.

Data published by the Italian Statistical Office (Istat) revealed that inflation jumped from 3.3 percent in August to 4.2 percent in September.

The country's EU-compliant annual inflation data climbed from 3.2 percent in August to 4.1 percent in September.

In Spain, the inflation rate reached 5.0 percent in September, from 4.6 percent in August.

All announced data are well above the ECB's official target of 2 percent.

The ECB, which raised its benchmark interest rate to 2.5 percent earlier this month and made two increases in the summer in order to rein in inflation, is facing a new monetary tightening pressure.

Financial markets are pricing in four more interest rate increases in the next year.

Rory Fennessy, senior European economist at Oxford Economics, said a correction in energy prices was not expected any time soon as winter approaches and signs of a resolution to tensions in the Middle East are weak.

Speaking to Reuters, Fennessy argued that an upward surprise in inflation in September would strengthen the hawkish wing in the ECB Governing Council's demand for more aggressive tightening.

Fennessy also noted that core inflation, which excludes unprocessed food and energy, has not yet moved significantly, but the new jump in energy costs could push core indicators up until early 2027.

In contrast, ECB President Christine Lagarde said on Monday that this year's inflation wave had not yet caused dangerous second-round effects across the Eurozone and that a moderate policy response remained appropriate.

The fact that core inflation in Germany remained constant at 2.4 percent for the third consecutive month in September is among the factors that support this view.

Public bank KfW Chief Economist Dirk Schumacher stated that this data will ease the pressure on the ECB to raise interest rates urgently.

Capital Economics Chief Economist Jack Allen-Reynolds emphasized that the indirect effects of high energy costs have begun to spread to the economy, but this will not be enough to immediately change the balances within the ECB.

Allen-Reynolds expects policymakers to keep interest rates steady at the October meeting and raise them again in December, when updated economic forecasts will be announced.