Eurozone’s largest economies report mixed October inflation as energy shock spreads

Inflation data released on Friday by the eurozone’s four largest economies painted a mixed picture, with rates accelerating sharply in Italy and France, holding steady in Spain, and falling in Germany. The figures, published ahead of Eurostat’s flash estimate for the currency bloc next week, underscored the persistent pressure from energy prices and renewed concerns about stagflation. Italy recorded the highest annual inflation at 5.4% in October, up from 4.2% in September and well above the 4.6% economists had expected.

Italian harmonised inflation reached 5.6%, driven by a surge in energy prices that were 31.4% higher than a year earlier, compared with 22.6% in September. Regulated energy tariffs jumped 59.5% year-on-year, including an 18.8% increase in October alone. The cost of the “shopping trolley” basket rose 2.5%, up from 1.5%, while unprocessed food prices climbed 7.5%. Core inflation, which excludes energy and food, edged up to 2% from 1.6%. Italy’s economy did not grow in the third quarter, according to Istat.

Spain’s inflation remained at 4.9% in October, unchanged from September and near its highest level since early 2023. Consumer prices rose 0.6% month-on-month, with the annual rate held steady largely because fuel was cheaper than a year earlier, partially offset by higher gas tariffs. Underlying inflation was 3.1%, and the harmonised rate was 4.9%, down from 5%. The Spanish economy grew 0.6% in the third quarter, supported by stronger domestic demand, according to Joe Nellis, head of economic research at MHA.

France faces stagflation as prices accelerate

France’s inflation rate climbed to 3.4% in October from 3.1%, the highest since January 2024 and above the 3.2% forecast by economists. Energy prices were 24.1% higher than a year earlier, marking the fourth consecutive month of acceleration, driven by gas and oil products. Services inflation was 2.7%, with hotel and transport prices rising. The French economy shrank by 0.1% in the third quarter, prompting Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, to state: “France faces stagflation.” Vistesen expects French harmonised inflation to exceed 4% by November.

Germany bucked the trend, with inflation falling to 2.8% in October from 3.3%, below the 3% forecast. The decline was attributed to a fuel tax cut effective from 1 October until the end of the year, which helped reduce energy inflation to 12.2% from 14.9%. Consumer prices fell 0.2% compared with September, and core inflation dropped to 2.1% from 2.4%. Vistesen cautioned that German energy inflation would likely remain subdued through year-end but could snap back in January and February if fuel duties rise again. “The current German core inflation numbers look dovish, but this weakness won’t last long,” he said.

ECB faces tough choices amid stagflationary risks

The eurozone economy grew 0.4% in the third quarter, but the inflation data led Paolo Grignani, senior economist at Oxford Economics, to describe “a mixed picture for the Eurozone with stagflationary tendencies.” Grignani noted that energy was still doing the heavy lifting and warned of “worrying signs of the energy shock spreading rapidly to stickier components.” Oxford Economics expects the European Central Bank to raise rates twice more. The ECB kept its deposit rate at 2.5% on Thursday, after a hike in September, with President Christine Lagarde saying policymakers discussed another increase but agreed unanimously to wait. Lagarde also announced she will step down in February, nine months before her term ends.

Matthew Ryan, head of market strategy at Ebury, said a December hike remains “very much ‘live’,” and that the drawn-out search for Lagarde’s successor “could inject volatility into markets at an already fragile moment.” Joe Nellis of MHA said the ECB is in a tough position, with years of sluggish growth arguing for supportive borrowing costs, but mounting price pressures may force the central bank to raise rates further at its December meeting. Before the Italian data, BofA Global Research had expected eurozone inflation of 3.7% in October; after the surprise, Pantheon Macroeconomics raised its forecast to 4%, up from 3.8% in September and twice the ECB’s 2% target.