Inflation in the euro zone unexpectedly accelerated in October, raising concerns about the trajectory of price growth and influencing the European Central Bank’s (ECB) approach to interest rates. The annual inflation rate in the 20 countries using the euro jumped to 2% in October, up from 1.7% in September. This increase was primarily driven by higher food and energy costs and surpassed economists’ expectations of 1.9%, according to a Reuters poll.
A more closely monitored metric, which excludes volatile food and energy prices, remained steady at 2.7%, also above forecasts of 2.6%, as reported by Eurostat. Despite inflation falling rapidly from double-digit levels two years ago, economists anticipate that it will return to the ECB’s target of 2% sometime in the first half of 2025, though some fluctuations are expected in the latter part of the year.
This relatively swift return to the target has sparked a debate among ECB officials. Some members express concern that price growth may fall below the target, prompting the need for stimulus measures to prevent excessively low inflation. This perspective could lead to a quicker pace of interest rate cuts and support a larger-than-usual reduction in December.
However, this view has not gained significant traction within the ECB. More conservative members, often referred to as policy hawks, argue for a cautious and gradual approach. They highlight that various factors still pose risks for rising prices, particularly in the services sector, which continues to show robust inflation at 3.9%.
Wage growth also exceeds the 3% rate deemed consistent with the ECB’s inflation target, while households benefit from substantial savings, potentially stimulating consumer spending and overall economic growth. The labor market remains tight, with the unemployment rate holding steady at a historic low of 6.3% in September, as indicated by separate Eurostat data.
The argument from those advocating for continued caution received a boost this week with new data revealing that the euro zone economy expanded by 0.4% in the third quarter, double the expected growth rate. Germany, France, and Spain displayed surprising resilience, although economists generally agree that meaningful growth rebounds remain unlikely. The euro zone is expected to continue growing at a modest pace, below its potential.
Despite these mixed signals, further interest rate cuts from the ECB appear imminent. No policymakers have contested the necessity of another rate adjustment on December 12, suggesting that such a move is almost certain unless significant data changes the outlook.
Financial investors are now betting that the ECB’s current deposit rate of 3.25% could fall to 2% or lower by the end of 2025. However, significant uncertainties loom, particularly regarding the upcoming U.S. elections, which policymakers warn could have profound implications for trade, growth, and inflation, necessitating future policy actions.