Eurozone Inflation Rises to 4%, Driven by Energy Costs — 2nd Update

By Ed Frankl

Inflation in the eurozone reached double the European Central Bank's target in October as energy costs continued to rise, reinforcing expectations that policymakers could hike the key interest rate again after holding it steady last week.

Consumer prices were 4.0% higher in October than the same month last year, accelerating from a 3.8% increase in September, the European Union's statistics office Eurostat said Wednesday. That marked the highest rate of inflation since September 2023 and a fourth straight monthly increase. Economists surveyed last week by The Wall Street Journal expected inflation at 3.9%.

The increase was again driven by energy prices, as uncertainty persisted about the lack of resolution of the war in the Middle East. Brent crude oil traded well above $100 a barrel in October, while natural-gas prices also surged in the month, ahead of the European winter and with stocks already dwindling to multiyear lows.

Energy prices in October were 21% higher than a year earlier, compared with 19% in September, Eurostat data showed. Headline inflation in the 21-nation currency area had been as low as 1.9% in February, before the first U.S.-Israeli airstrikes on Iran.

"Given the unresolved conflict with Iran, inflation rates of this magnitude are set to persist over the coming months. A noticeable slowdown in inflation is not expected until the second quarter of 2027," said Stephanie Schoenwald, economist at Germany's KfW Research.

Despite inflation edging even further above the ECB's 2% target, there are signs that spillover from escalating energy prices into other parts of the economy has been more benign than in the last inflationary surge four years ago.

ECB analysis published this week said food retailers had raised prices less frequently than in 2022 after Russia's full-scale invasion of Ukraine. Food prices increased shortly after the start of this year's energy shock before broadly stabilizing, the report said.

Changing food prices are especially important in influencing consumers' expectations surrounding inflation, especially for lower-income households, accounting for around 20% of expenditure in Eurostat's consumption basket. Higher inflation expectations can lead to stronger demands for wage increases.

The ECB chose not to raise interest rates last week despite the enduring pickup in energy prices.

Outgoing ECB President Christine Lagarde said that although the full effects of the energy shock are still unfolding, underlying inflation was broadly stable and there was little evidence of wages climbing.

Core inflation--which strips out more volatile components including energy and food--held at 2.5%, the same as September, Eurostat said.

The ECB's headline wage tracker also published Wednesday suggests slightly higher wage growth in the first nine months of 2027 compared with 2026, though with increases slowing in the second half of next year.

The central bank has raised its key rate twice this year to 2.5%, having judged that energy costs were too strong to ignore. Most investors expect policymakers to raise the key rate again in December, with another hike anticipated by June next year.

Put together, Wednesday's data doesn't strengthen the case for raising interest rates in December, said Diego Iscaro, economist at S&P Global Market Intelligence.

But should commodity prices remain at current levels and business surveys continue to point to persistent underlying inflation, a quarter-point hike is still likely, he said.

Government efforts to support households are also having an impact on inflation. German consumers were helped by an energy-tax cut in October.

Higher energy inflation in France and Italy offset easing energy price pressures in Germany and Spain, following renewed and extended fuel-duty cuts in the latter two, Pantheon Macroeconomics economists Claus Vistesen and Melanie Debono said in a note to clients.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

November 04, 2026 06:18 ET (11:18 GMT)