Euro zone inflation hits record high 10%, raising pressure on ECB

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FRANKFURT – Eurozone inflation topped earlier forecasts to hit a new record high this month, bolstering expectations of another interest rate hike by the European Central Bank in October.

Price growth in the 19 countries that share the euro accelerated to 10.0% in September from 9.1% the previous month, Eurostat data showed on Friday, beating expectations for a reading of 9.7%

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Figures a day earlier had shown inflation in Germany, the bloc’s biggest economy, jumped to its highest rate since the era of the Korean War 70 years ago.

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Inflation was still mainly driven by volatility in energy and food prices, but continued to widen, with virtually every category from services to industrial goods now showing painfully high readings.

This is likely to make uncomfortable reading for the ECB, which is targeting price growth of 2%, as it suggests inflation is increasingly fueled by excess demand and risks entrench

Indeed, core inflation, which filters out volatile food and fuel prices and is closely watched by the ECB, also jumped to a new high, increasing the urgency for more rate hikes after outsized moves in July and September

Excluding food and fuel prices, inflation rose to 6.1% from 5.5%, while an even narrower measure, which also excludes alcohol and tobacco, rose to 4 .8% from 4.3%.

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Meanwhile, energy prices rose 41% from a year ago, while unprocessed food rose 13%.

Although the ECB’s next rate meeting is almost a month away, many policymakers have already advocated another rate hike of 75 basis points after a combined 125 basis points of moves in two meetings, the pace most rapid tightening of ECB policy that has been recorded. .

Markets now see the 0.75% deposit rate rising to around 2% by the end of the year, then around 3% next spring before leveling off.

A key issue is that an inflation peak, many times predicted by the ECB, could still be months away as household energy contracts are priced back in and skyrocketing gas prices filter through.

A devastating summer drought will keep food prices under pressure, while the euro’s fall to a two-decade low against the dollar will fuel imported inflation, especially as the bloc’s energy bill is largely denominated in dollars.

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But price pressures may be tamed by a looming recession. Expensive energy and expected gas shortages are draining savings and are likely to eat deeply into growth as consumers run out of cash.

The European Systemic Risk Board, the EU’s financial risk watchdog, warned on Thursday that a perfect storm could be brewing that could challenge financial stability as businesses and households that have not yet recovered from the pandemic now face a new success.

Confidence indicators across the bloc have also plummeted in recent weeks, suggesting the eurozone may already be in recession with little respite likely until the spring.

This could also provide desperately needed help for the ECB.

Workers would typically demand large wage increases during episodes of high inflation, but businesses also face rising costs, leaving them with little cash to raise wages. This keeps wage growth muted and offers hope that price growth will stabilize and begin to recede next year. (Reporting by Balazs Koranyi; Editing by Catherine Evans)



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