EZ CPI Review - Inflation Increase Will Help Cement December Hike
Rising oil and gas prices drove annual headline inflation to 4%, a three year high, from 3.8% in September. Core inflation was unchanged at 2.5% while services rose to 3.3% highlighting that this inflation upsurge so far remains an energy story. The breakdown of the flash estimate showed the increase in headline inflation was largely due to a 20.8% increase in energy costs.
Today’s figures do not add hugely to the narrative we already knew. However, a poor start to Q4 inflation will mean that the average for the quarter will be above the ECB’s current projection of 3.6%. That will embolden ECB hawks to push for a hike in December with comments from Bundesbank Nagel cementing that view.
The German policymaker said that “another interest rate hike in December is almost unavoidable.” Adding that “there is little alternative to raising rates unless the inflation outlook improves substantially” - and that is unlikely in the very near term. Headline inflation could tick-up further early next year, affected by ongoing oil price volatility and the start of winter (gas prices and low gas storage levels). The annual inflation is then expected to slow noticeably from Q2 as the large month on month increases recorded at the start of the conflict drop out of the annual inflation measure.
Nagel also said that the new economic projections that will published next month will extend its outlook to 2029 and the rate “decision will be based on these projections." We expect those projections to show a higher peak for inflation along with moderate growth. December’s projections will also heavily evaluate whether elevated energy costs are feeding into wage growth demands. So far they haven’t with the latest ECB wage tracker showing wage growth of 2.7% for the second half of 2026 and expected to rise to 2.8% for the first half of 2027. We continue to expect ECB rates to peak at 2.75%.
Figure 1: Eurozone HICP and Key Components (Y/Y% and Percentage Points)
Source: Datastream/CE