Inflation in the euro area was 3.8 percent in September. The European statistics office Eurostat in Luxembourg announced this on Friday after an initial estimate. In August the rate was 3.2 percent, after 2.9 percent in July. The European Central Bank (ECB)'s medium-term target is two percent.
The main driver of inflation continues to be energy prices; especially everything that depends on the raw material oil. Heating oil, gasoline and diesel show double-digit inflation rates compared to the same month last year. On average, food prices are only increasing slightly, even if certain foods, such as vegetables, have become significantly more expensive due to poor harvests due to the drought.
Wages have not yet reacted particularly strongly to this wave of inflation. The ECB central bankers are currently monitoring such “second-round effects” very closely because they could be signs of a further spread of inflation; among other things, with an indicator called “ECB Wage Tracker”. This shows a wage increase of 2.7 percent as an expectation for the first quarter of 2027.
From what we have heard so far from the ECB, the development in this respect is not yet considered to be very threatening. But that can also be a question of time. Many surveys indicate that companies plan to pass on the higher costs of expensive energy to their customers through higher sales prices.
Depending on the Euro country, the development varies. In Germany, inflation according to the Harmonized Index of Consumer Prices (HICP), which is used for comparisons with other euro countries, was 3.3 percent in September.
In this country there were slightly lower rates during the months of the previous fuel discount in May and June, and this will probably also be the case under the new fuel discount from October. Economist Holger Schmieding from Bankhaus Berenberg estimates this effect to be 0.3 percentage points of the inflation rate. Christoph Swonke from DZ Bank nevertheless emphasizes that the fuel discount “will not solve the inflation problems”.
In France, which had had low rates for some time due to political intervention, the inflation rate rose from 2.6 to 3.4 percent in September. This is the highest level in more than two years. In Italy the rate increased from 3.2 to 4.1 percent; An unusually high value has now been reached there. In Spain it rose unexpectedly sharply from 4.6 to 5.0 percent.
The ECB's next interest rate decision is due on October 29th. The majority of financial markets believe it is likely that the central bank will wait and see, but will raise interest rates in December and probably again next year.
However, an interest rate increase in October can no longer be completely ruled out. “The rise in inflation is becoming more widespread,” emphasized Michael Heise, chief economist at HQ Trust. He believes that the ECB will have to take action as early as October: "The only thing that would be better for consumers would be a significant relaxation on the oil and gas markets; desirable, but unfortunately not foreseeable at the moment."
ECB President Christine Lagarde said in Brussels that the central bank wanted to react “with a sense of proportion”. Inflation is moving on a “medium” path, which only requires moderate interest rate increases from the ECB: “At this point in time, we see no evidence that energy prices are being transferred to wages.”
In a speech in Luxembourg, the outgoing ECB board member Isabel Schnabel referred to the ongoing risk of inflation. The ECB economists' projections from September assumed that inflation would still be 2.1 percent in 2028, slightly above the central bank's inflation target of 2.0 percent. Since the cut-off date of the forecasts, oil and gas prices have also moved closer to the unfavorable scenario, indicating a stronger and more persistent deviation of inflation from the ECB target.
Analysts at Landesbank Hessen-Thüringen (Helaba) wrote that the widening spreads, i.e. the difference between the yields of individual government bonds from euro countries and the federal bond, were becoming increasingly worrying. French yields, among other things, had recently risen sharply. The Helaba analysts believe that a relatively large amount has already been “priced in” on the financial markets with almost three interest rate increases by the ECB.
