Soaring Energy Costs Push Eurozone Inflation to Highest Level in 13 Years

The euro sign is photographed in front of the former headquarters of the European Central Bank in Frankfurt, Germany, on April 9, 2019. (Kai Pfaffenbach/Reuters)

Inflation in the 19 European countries that share the euro hit a 13-year high, challenging the European Central Bank’s (ECB) view that price pressures are largely benign and will soon fade.

Consumer price inflation in the eurozone accelerated to 3.4 percent over the year in September, up from 3 percent a month earlier and 2.2 percent the month before that, according to Oct. 1 data (pdf) from Eurostat, the European Union’s statisics agency. That’s the highest reading since September 2008 and slightly ahead of analyst forecasts of 3.3 percent.

A surge in energy costs was behind the bulk of the inflationary pressure, with energy prices rising 17.4 percent over the year and 1.3 percent over the month in September.

Factors behind the run-up in energy costs in Europe include a demand rebound from the lows of the pandemic recession, OPEC production caps, and global transport bottlenecks. Lackluster output from Europe’s windmills and solar farms, low natural gas stockpiles, and maintenance work taking nuclear generators and other plans offline have also contributed.

Energy cost inflation eclipsed the next highest category—unprocessed food—which advanced 2.6 percent in the 12 months through September though it stayed flat over the month.

Supply chain woes showed up in the data, with production and shipping bottlenecks contributing to a run-up in the prices of durable goods, which rose 2.1 percent over the year and 2.3 percent over the month in September.

Policymakers at the ECB, like their counterparts at the Federal Reserve, have taken the view that inflation is transitory and will fade once supply chain dislocations abate. Both expect price pressures to ease next year and fall closer to their respective targets—essentially the same 2 percent longer-run average that accommodates a moderate overshoot to compensate for years of below target inflation.

Still, ECB President Christine Lagarde struck a more cautious tone this week, pointing to increased inflation risks, even as she called for patience and warned against pulling back stimulus too quickly.

Some economists believe central bank policymakers may be underestimating the inflation risk.

“In our view, some one-off factors should indeed fade away next year but inflation could turn out to be stickier than the ‘transitory’ camp currently assumes,” Carsten Brzeski, global head of macro at ING Germany, said in a note on Friday.

But while economists generally expect heated debate at the ECB’s next policy meeting around the optimal pace of asset purchases, discussions around interest rate hikes appear far off.

“With yet another surge in headline inflation, the heat is on for the European Central Bank’s December discussion on whether a pure recalibration of asset purchases is enough or whether a more significant rewinding would be better,” Brzeski wrote.