Euro zone inflation soars past forecasts to new record high

FRANKFURT (Reuters) – Euro zone inflation surged past expectations yet again this month to hit a record high, pointing to further interest rate hikes from the European Central Bank as price pressures appear to be broadening.

Consumer price growth in the 19 countries sharing the euro accelerated to 10.7% in October from 9.9% a month earlier, beating expectations in a Reuters poll for 10.2% as inflation in Germany, Italy and France all rose more than forecast, data from Eurostat, showed on Monday.

Energy prices continued to drive inflation but food and imported industrial goods all pushed prices sharply higher even as services played only a marginal role this time.

The ECB has raised rates a combined 200 basis points in the past three months and promised further tightening as soon as December. But markets have started to anticipate a slowdown in rate hikes as a recession looms and gas prices have come down from record highs.

Graphic: Euro zone’s persisting inflation concerns –

But policymakers are likely to be concerned that underlying price growth, which filters out volatile food and fuel prices, continued to accelerate, pointing to broadening price pressures, which raises the risk that high inflation will get entrenched.

Indeed, inflation excluding unprocessed food and energy accelerated to 6.4% from 6.0%, while an even narrower measure that also filters out alcohol and tobacco rose to 5.0% from 4.8%.

Markets priced out some rate hikes last week after ECB chief Christine Lagarde provided a sombre outlook for economic growth but a string of grim price data since then turned investor sentiment around at least partially.

Klaas Knot, the hawkish head of the Dutch central bank, also helped push expectations back up after he said that a lot more policy tightening is still needed and the December hike will be a choice between 50 and 75 basis points.

The ECB’s deposit rate, now at 1.5%, is seen peaking at just below 2.9% in 2023, a big jump compared with expectations around 2.6% after the ECB’s policy meeting last Thursday. But that is still below the 3.2% markets had priced in only a few weeks ago.

Part of the change is that economists now expect the bloc to be in recession through the end of the first quarter of 2023 and such a downturn is likely to be naturally deflationary, making the ECB’s job easier.

Graphic: Energy and food inflation continue to soar –

Gas prices, though still high, are also well down from their late-summer peaks, raising hopes that Europe may find it easier to wean its economy off Russian gas than many had feared.

But the weak euro is adding to price pressures while wage growth is also inching up, a key worry as a wage-price spiral would make inflation even more difficult to break.

The ECB will next meet on Dec. 15, and a host of new readings on the economy plus the U.S. Federal Reserve’s own guidance on policy, may guide its decision then more than Monday’s data.

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