Euro zone inflation hits 4% for first time in three years as interest rate hike looms

Inflation in the euro area jumped to a three-year high of 4% in October, a flash estimate showed on Wednesday.

The reading is in line with the expectations of economists polled by Reuters and was up from 3.8% in September.

Officials said the increase was largely due to surging energy costs, with energy inflation rising to 20.8% from 18.9% in September. Europe, a net energy importer, is vulnerable to external energy shocks and has seen prices rise steadily since the start of the Iran war.

October marked the first time inflation in the euro zone has hit or exceeded the 4% threshold since Sept. 2023's reading of 4.3%.

Inflation also varied across the 21 euro zone economies, with Lithuania recording the hottest inflation rate of 6.1% while Malta's was the lowest at 2.3%. All euro zone countries saw inflation hold above the European Central Bank's 2% target.

The European Central Bank kept its key interest rate at 2.5% last month, following a hike of 25 basis points in September.

Shortly before Wednesday's inflation print, markets were pricing in a 71.8% chance of a hike at the ECB's final meeting of the year in December. Following the data release, markets were pricing in more than a 72% chance of rates rising.

Robert Mertens, global capital markets senior analyst at Validus Risk Management, cautioned that "ongoing turmoil in the French bond market is placing constraints on ECB policy" and the bank's capacity to get inflation under control.

"Should we see an easing in French political unrest, the ECB could potentially pursue a more aggressive hiking path," he said. "If the ECB can deploy more aggressive tightening relative to the Federal Reserve, we would see increased Euro support and upside versus the Dollar."