The breakdownThe headline estimate reaffirms that inflation continues to surge higher in the euro area at the end of the third quarter. That is largely driven by energy prices, which jumped by 18.8% in September compared to the 14.3% rise in the month before.
Besides that, there were also increases in food and services inflation. Food, alcohol and tobacco prices rose 1.4% on the year, up from 1.1% in August. Meanwhile, services inflation picked up to 3.2% in September from 3.0% in the month before. The latter is more important when looking at underlying price pressures, helping to push core inflation slightly higher to 2.5%.
For the ECB, it reinforces the argument that policymakers cannot afford to assume the inflation problem is under control just yet. The central bank is already facing an uncomfortable combination of higher inflation and tighter financial conditions, with bond yields having risen sharply in recent weeks.
And so the headline rate closing in on 4% is hardly comforting. But the main question will continue to be whether the energy shock remains largely contained or starts feeding more meaningfully into core prices and services over the coming months.
What does the data measure?The CPI measures changes in the prices consumers pay for goods and services across the euro area. The headline figure includes all categories, while core inflation strips out volatile food and energy prices to give a clearer indication of underlying price pressures.
Why does it matter to markets?Inflation is one of the ECB’s most important inputs when setting interest rates at this juncture. With Eurozone inflation already above the ECB’s 2% target and energy prices rising sharply, markets are watching closely for signs that the shock is starting to spread beyond energy into services, wages and other underlying prices.
How does this fit the broader economic picture?The September report comes against a backdrop of much stronger energy-driven inflation across the euro area. Preliminary national readings showed HICP inflation accelerating to 3.3% in Germany, 3.4% in France, 4.1% in Italy and 5.0% in Spain, while core pressures have so far remained comparatively contained. At the same time, higher bond yields are tightening financial conditions and creating an uncomfortable mix of stronger inflation but greater downside risks to growth.
What is the potential market impact?A stronger-than-expected reading, particularly in core inflation, could reinforce expectations for further ECB tightening. That should push European bond yields higher and offer some support to the euro, while higher rate expectations could weigh on equities; vice versa.
Current relevance to markets?Very high. Markets are already repricing the ECB outlook amid the renewed inflation shock and a sharp rise in European yields. The bigger market-moving question will be whether core inflation also starts accelerating, which would make it harder for the ECB to treat the current episode as primarily an energy shock.
This article was written by Justin Low at investinglive.com.
Source: Investing Live - News
