Inflation in the 20-nation euro zone increased to 2% in October, according to preliminary data from the statistics agency Eurostat released on Thursday. Economists surveyed by Reuters had predicted a headline figure of 1.9%. The initial reading for September was revised downward to 1.7% from 1.8% on October 17, falling below market expectations.
The main driver behind the rise in the headline rate was food, alcohol, and tobacco, with price increases accelerating to 2.9% from 2.4%. Core inflation, which excludes these volatile components and energy prices, remained steady at 2.7%, slightly above the expected 2.6%. Services inflation, a key indicator of domestic price pressures, also held firm at 3.9%.
Following the release, the euro strengthened by 0.15% against the U.S. dollar, reaching a two-week high of $1.087. The latest inflation data on Thursday was considered crucial in determining whether the European Central Bank might contemplate a substantial half-percentage-point interest rate cut at its upcoming meeting in December.
The central bank has already reduced rates three times this year, in increments of a quarter-point, bringing the key rate down from 4% to 3.25%. Currently, markets are pricing in another 25-basis-point reduction for December.
Traders are also analyzing the most recent growth figures for the euro area, which revealed a better-than-expected 0.4% expansion in the third quarter, despite forecasts of continued weakness. During its October meeting, the ECB stated that the disinflation process was progressing as planned and that the sluggish economic activity in the euro zone had increased confidence that inflation would not spike significantly.
Kyle Chapman, a foreign exchange market analyst at Ballinger Group, mentioned that the hotter eurozone inflation, stronger growth, and low unemployment rates have diminished expectations for a 50-basis-point cut. He highlighted that while an increase in consumer price growth was anticipated by year-end, services inflation remained stubborn.
Chapman emphasized that concerns about inflation falling below the target were diminishing, especially with the positive growth and employment data this week. He suggested that consecutive 25-basis-point adjustments were appropriate, as the necessity for rates below neutral to support a contracting eurozone economy was diminishing, reducing the urgency to accelerate the easing cycle, particularly with services inflation showing resistance to change.
