Key Takeaways
- Energy prices drove overall eurozone inflation to 3.8% in September, above expectations of 3.6%. Core inflation edged up to 2.5% from 2.4% in August.
- Inflation accelerated across the eurozone’s largest economies and remains well above the European Central Bank’s 2% target.
- Derivatives markets are pricing in a rate increase in the last ECB meeting of the year in December.
Rising energy prices drove eurozone consumer prices up by a stronger-than-expected 3.8% for the 12 months to September, and analysts say the hot inflation report puts more pressure on the European Central Bank to increase interest rates at the last two meetings of 2026.
Economists had expected inflation to rise by 3.6% in September. The 3.8% flash estimate from Eurostat follows a 3.2% increase for August.
Core inflation, which excludes volatile components such as energy and food, came in at 2.5% in September, from 2.4% in August. This was in line with expectations. However, eurozone inflation remains well above the European Central Bank’s medium-term inflation target of 2%.
“This move represents the highest level of inflation we’ve seen in three years, far in excess of the European Central Bank’s 2% inflation target,” Michael Field, chief European markets strategist at Morningstar. “This likely means that the ECB’s 25 basis point interest rate increase we saw in September won’t be the last of its kind. The bank may need to continue raising rates to bring inflation back toward target.”
According to Eurostat’s estimates, annual energy inflation came in at 18.8%, up from 14.3% in August. Services inflation rose by 3.2%, compared with August’s reading of 3.0%. Food, alcohol, and tobacco prices increased by 1.4%, up from August’s reading of 1.1%. Nonenergy industrial goods prices were up 1.1% year over year, compared with 1.2% in August.
The inflation figures came amid renewed pressure on global bond markets, with the 10-year US Treasury yield hitting a 24-year high of 5.3% on Oct. 1 and France’s 10-year government bond yield approaching 5%. The spread between French government bond yields and German Bunds widened to almost 130 basis points, the highest since the 2012 eurozone debt crisis, as the euro fell to a 17-month low against the US dollar.
Will the ECB Raise Interest Rates on Oct. 29?
Activity on derivatives markets implies a 11.7% chance of a 0.25 percentage point ECB rate hike in October, but this rises to a near 70% chance at the December meeting.
ECB President Christine Lagarde this week signaled little urgency to raise rates further, saying higher bond yields would slow growth and limit the spillover of the energy shock into broader prices, Bloomberg reports.
A Mixed Inflation Picture Across the Eurozone
Inflation varied across the bloc. Germany’s inflation came in at 3.3%, up from 2.9% in August. The fuel tax cut that took effect Oct. 1 could lower petrol and diesel prices by up to around 17 cents per liter if fully passed on to consumers, says Sebastian Becker, an economist at Deutsche Bank Research. This could shave roughly 0.2 percentage points off German headline inflation by the end of the year, he estimates. Becker forecasts average German inflation of 2.7% for 2026.
Italy’s annual inflation came in at 4.1% in September, compared with 3.2% in August. France’s inflation rose to 3.4% from 2.6% in August, as energy inflation accelerated to 21.2% in September from 16.7% year-over-year in August, Insee reports.
Spain’s year-over-year figure came in at 5.0%, an increase from 4.6% in August. Lithuania, meanwhile, reported an annual harmonized rate of 6.1%.
