Frankfurt — Eurozone inflation accelerated more than expected in October and could still pick up further, bolstering the case for caution in European Central Bank (ECB) interest rate cuts as price growth isn’t fully tamed yet.
Inflation in the 20 countries sharing the euro currency accelerated to 2.0% from 1.7% in September, mostly on higher food and energy costs and above expectations for 1.9% in a survey of economists.
However, a more closely watched figure which strips out volatile food and energy prices held steady at 2.7%, above forecasts for 2.6%, Eurostat said on Thursday.
Inflation has fallen quickly since hitting double-digit territory two years ago and most economists see it back at the ECB’s 2% target in the first half of next year after some volatility in the final months of 2024.
That relatively quick return to target has also fuelled a debate in recent weeks. Some ECB officials argue there is a growing risk price growth will fall below target and the ECB will have to start stimulating growth to prevent excessively low inflation.
Such a dim outlook could even force the ECB to accelerate the pace of rate cuts and bolster the case for a bigger than usual step in December, some officials said.
The argument has yet to gain significant traction. Policy hawks have pushed back, arguing for measured, incremental steps because a long list of factors could still push prices higher.
A big concern is that inflation in services, the biggest single item in the consumer price basket remains way too fast, holding steady at 3.9%.
Wage growth is also faster than the 3% rate the ECB considers consistent with its target and households are sitting on ample savings, which could bolster consumer savings and overall growth.
The labour market also remains tight with the jobless rate holding steady at an all-time low of 6.3% in September, separate Eurostat data showed on Thursday.
The policy doves’ argument that overall growth is simply too weak to sustain 2% inflation was also dealt a blow this week when fresh data showed the economy expanding at 0.4% in the third quarter, twice as fast as expected. Germany, France and Spain all showed surprising resilience.
But economists also appear to agree that no meaningful rebound in growth is likely and the eurozone will continue to grow at a lukewarm pace, below what is considered its potential.
That is why further ECB rate cuts are almost assured and no policymaker has challenged the need to move again on December 12, suggesting that the step is largely a done deal, unless major data surprises alter the outlook.
Financial investors are now betting the ECB’s 3.25% deposit rate could dip to 2% or even below that by the end of 2025.
The biggest uncertainty, however, is likely to be the US election, policymakers say, since it could have far-reaching implications for trade, growth and inflation, which may require policy action further down the road.
Reuters
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