Energy pushes euro zone inflation to 4%, and Italy’s leaps to 5.6% in a month

Inflation in the euro zone has climbed to its highest level in three years, and nearly all of the acceleration traces back to a single line on the household bill. Energy, a small slice of what the typical European spends each month, is now doing roughly half the work of pushing prices up, according to Eurostat’s first estimate. Take it out, and the rest of the basket looks almost calm.

That split is what makes the reading so awkward for anyone with a variable-rate mortgage, a heating bill or a salary agreed before the shock began. The European Central Bank fights inflation with interest rates, a tool that cannot make oil or gas any cheaper but does make borrowing more expensive, and investors now expect it to reach for that tool again at its next meeting.

Headline inflation reached 4.0% in October, up from 3.8% in September and the first reading at or above 4% since the autumn of 2023. Energy prices were 20.8% higher than a year earlier. On Eurostat’s own basket weights, energy makes up about 9% of consumer spending yet contributed close to two of those four percentage points. Core inflation, which strips out energy, food, alcohol and tobacco, held at 2.5%, while services edged up to 3.3%.

Italy shows how unevenly the shock lands. Its harmonised inflation rate jumped to 5.6% from 4.2% in a single month, and the national statistics office, Istat, traced the move mainly to energy, with regulated energy tariffs up 59.5% on the year. Even Istat’s shopping-cart index of everyday staples accelerated to 2.5% from 1.5%.

Across the bloc’s 21 members, the spread is wide. Lithuania posted 6.1% and Bulgaria, in its first year using the euro, 6.0%, while Germany’s rate fell to 2.8% and Malta’s sat lowest at 2.3%. A single interest rate now has to serve an Italian household facing a utility shock and a German one whose inflation is easing. EU members outside the euro, such as Poland, Sweden and Romania, set their own rates, though Denmark, whose krone is pegged to the euro, usually shadows the ECB.

The ECB has already raised rates twice this year, in June and September, taking its deposit rate to 2.5% before holding in October. Its case for going further is to stop an energy spike seeping into wages and expectations. The case against sits in the core figure, which has barely moved, and in the fact that a higher rate will not lower an energy bill inflated by the US-Iran war and the threat to shipping through the Strait of Hormuz. Ed Hutchings, head of rates at Aviva Investors, warned after the September hike that “things may well have gone too far,” while Robert Mertens of Validus Risk Management argues that turmoil in the French bond market limits how hard the bank can push.

For borrowers, the tightening has already arrived. The 12-month Euribor, the benchmark for most variable-rate mortgages in Spain and common in Portugal and Italy, averaged about 3.24% in October, roughly a full point above a year earlier, according to Spanish mortgage trackers, so loans resetting this autumn cost more each month. Savers gain little: cash earning the ECB’s 2.5% deposit rate still loses ground to 4% inflation, and with pay broadly stable, as policymakers put it, many workers are getting poorer in real terms.

After the release, markets priced a better than 72% chance of a quarter-point hike at the ECB’s final meeting of the year, which concludes in Frankfurt on December 17, according to pricing cited by CNBC. Eurostat publishes full October data on November 18 and its November flash estimate on December 1, one more reading before the Governing Council decides.

For a family in Milan or Naples, the number that matters is not the euro zone’s 4%. It is the 59.5% jump in regulated energy tariffs, a bill no vote in Frankfurt can lower, arriving alongside a mortgage payment that one can push higher.

Tags: Italy, inflation, energy prices, European Central Bank, euro zone, Eurostat