EU Inflation Accelerates on Energy as Spain Hits 5%, Highest Since 2023

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Inflation in the European Union's large economies remains under pressure from rising energy prices, with September inflation readings for Germany, France, Italy and Spain all coming in above analyst expectations. Spain's inflation rate surged to 5%, the highest level since 2023, stirring concerns reminiscent of the last inflation spike in the region after Russia's invasion of Ukraine in 2022. Energy factors are still likely to push eurozone inflation close to 4% late this year, while a Bloomberg survey expects eurozone inflation, due to be published this Friday, to come in at 3.7%. A higher-than-expected reading would further raise the risk that inflation could exceed forecasts and push borrowing costs higher. Markets have nonetheless scaled back expectations that the European Central Bank will raise interest rates for a third time at its October meeting, since the inflation impact remains largely confined to the energy sector. ECB President Christine Lagarde said a global bond market selloff will help ease price pressures, while German two-year government bond yields fell 8 basis points to 3.22% and 10-year yields fell 6 basis points to 3.57% on Wednesday. Markets put the odds of a 0.25% ECB rate hike at its October 29 meeting at about one in three, and expect total rate increases of roughly 0.90% by the autumn of next year.

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