San Francisco Frontiers - Energy costs spark inflation surge across Europe

The annual rate hit 3.3 percent in Germany, Europe's biggest economy, the fastest pace since December 2023, according to preliminary data from the statistics agency Destatis.

In France consumer prices rose three percent in the month compared to a year earlier, the highest since February 2024 and a sharp increase from 2.4 percent in August, statistics office Insee said.

In Italy inflation jumped to 4.2 percent, nearly a full percentage point above the 3.3 percent recorded in August, the Istat agency reported.

The price hikes are well above the European Central Bank's inflation target of two percent, raising the likelihood it will raise interest rates further.

Diesel prices in particular have hit record highs in Germany, France, Italy and several other eurozone countries in recent weeks, a result of the Middle East war that has slowed shipments of both crude oil and refined fuels from the Gulf.

That has raised expectations among analysts that the ECB will tighten monetary policy further in the coming months to rein in inflation, potentially dampening the eurozone's economic growth.

The central bank raised its benchmark rate to 2.5 percent earlier this month.

Inflation data for the full eurozone will be released on Friday.

- Inflation 'feeding through' -

Jack Allen-Reynolds, an economist at Capital Economics, said the inflation readings "suggest that the indirect effects of higher energy costs are beginning to feed through" to the wider economy.

But he added that "this is unlikely to tip the balance for the ECB" and he expects policymakers to keep rates steady at their next meeting in October, before hiking again in December.

His view was shared by other analysts who said the central bank would wait until December, when it also releases updated economic forecasts.

Some analysts also noted that core inflation in Germany, which excludes volatile food and energy costs, was steady at 2.4 percent in September.

"This should ease the immediate pressure on the ECB to implement further monetary tightening at its next meeting," said Dirk Schumacher, chief economist at the German public lender KfW.

Still, Rory Fennessy of Oxford Economics said the latest inflation readings could shift the debate at the ECB.

"The fact that inflation has surprised to the upside in September will only strengthen the case among the hawks in the [ECB governing council] for a more aggressive pace of tightening," he said.

Analysts at ING meanwhile said the French figures "suggest that inflation is likely to remain above three percent for the rest of 2026 before gradually declining in 2027".

That will weigh on household purchasing power "at a time when consumption is weakening and rising interest rates are exacerbating France's fiscal difficulties" they said.

Consumer spending fell 0.5 percent in France in August, Insee also reported Wednesday, and the country's public debt stood at 119 percent of GDP in the second quarter -- nearly double the eurozone limit of 60 percent.

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A.Clark--SFF