Euro area inflation reaches four percent as rate hike expectations firm

Inflation in the euro area rose to a three-year high of four percent in October, according to a flash estimate released on Wednesday. The figure matched the consensus of economists polled by Reuters and represented an increase from the 3.8 percent recorded in September. Officials attributed the rise primarily to surging energy costs, noting that energy inflation climbed to 20.8 percent from 18.9 percent in the previous month. As a net energy importer, Europe remains vulnerable to external shocks, with prices rising steadily since the start of the Iran war.

This marks the first time the euro zone has hit or exceeded the four percent threshold since September 2023, when inflation stood at 4.3 percent. Variations were observed across the 21 member economies, with Lithuania recording the highest rate at 6.1 percent and Malta the lowest at 2.3 percent. Despite these differences, all euro zone countries maintained inflation above the European Central Bank’s two percent target. Market reactions included a 0.6 percent rise in the euro against the U.S. dollar on Wednesday morning, while the yield on the 10-year German bund, a key benchmark for euro zone bonds, edged higher.

Policymakers indicated that underlying inflation and wages remained broadly stable despite the headline figure. The European Central Bank had kept its key interest rate at 2.5 percent last month, following a 25 basis point increase in September. Ahead of the data release, markets priced in a 71.8 percent probability of a rate hike at the bank’s final meeting of the year in December. Following the release, this probability rose to over 72 percent. Robert Mertens, a senior analyst at Validus Risk Management, noted that turmoil in the French bond market is constraining ECB policy. He suggested that if French political unrest eases, the bank could pursue a more aggressive hiking path, potentially supporting the euro against the dollar.