Inflation in the euro area is rising: ECB before further interest rate hike

The consequences of the Iran war are increasingly being felt by consumers. Inflation in the euro area is rising significantly. Economists are firmly expecting the ECB to raise interest rates again.

Inflation in the euro zone hit another three-year high in September due to high energy prices. Prices in the 21 euro countries rose by 3.8 percent year-on-year last month. This was announced by the European statistics authority Eurostat, based in Luxembourg, based on an initial estimate. The inflation rate was last higher at 4.3 percent in September 2023.

According to Eurostat, energy products rose in price by 18.8 percent compared to the previous year - in August the increase was 14.3 percent. Services were 3.2 percent more expensive, here too the increase was higher than in August at 3.0 percent. Prices for food, alcohol and tobacco rose by 1.4 percent, 0.3 percentage points more than in August.

For Germany, the EU statisticians put the inflation rate at 3.3 percent, which was in line with the German Federal Statistical Office. The price increases were highest in Lithuania (6.1 percent), Cyprus and Luxembourg (5.2 percent each). Malta (2.4 percent) and Finland (2.6 percent) recorded the lowest inflation rates.

From the perspective of the financial markets, the European Central Bank (ECB) is likely to counteract price increases in the Eurozone by increasing interest rates by the end of the year. It had already reacted to the surge in inflation as a result of the ongoing Iran war in June and September and raised the key interest rate to the current 2.50 percent.

The ECB expects that overall inflation will remain well above the central bank's target of 2.0 percent until the first half of 2027. She wants to prevent the oil price shock from permanently changing the price structure: The high energy costs for consumers and companies fueled by the Iran war pose the risk that wages and prices will push each other up and inflation will become entrenched.

“It is primarily the massive price increases for energy that have caused inflation to rise to its highest level since autumn 2023. There are also increasing signs that companies are passing on the higher energy prices to their customers,” says Jörg Krämer, chief economist at Commerzbank. He sees a consolidation of inflation, which the ECB will not like. You will have to respond to this with higher key interest rates.

Alexander Krüger, chief economist at the private bank Bethmann Bank, adds that the crop failures due to the recent heat are also likely to lead to higher prices. The forecast is sobering: "If things go well, the inflation rate will fall below 3.0 percent next spring."