Euro area: Are core inflation risks increasing? – Commerzbank

Higher energy costs could put pressure on the ECB to raise rates next year as businesses pass them on to customers, according to a report by Commerzbank’s Dr. Vincent Stamer. Euro area headline inflation climbed to a three-year high of 4.0% in October, while core inflation held at 2.5%. Highlighting widespread price rises beyond energy, the report expects the pass-through of higher energy costs to lift core inflation towards or above 3%, potentially forcing an ECB rate hike next year.

Could core inflation move above the ECB target?

"In October, the inflation rate in the euro area broke the 4% mark for the first time in three years. After the inflation rate had already risen to 3.8% in September, it climbed to 4.0% in October, as expected. This was driven not only by energy prices, but by a broad-based increase in prices across the entire consumer basket."

"In light of more expensive energy, companies are likely to increasingly raise the prices of other goods and services in the coming months."

"We expect many companies to pass the higher energy prices on to their customers in the coming months. In addition to more expensive fuels, the increased price of natural gas is also likely to raise costs for electricity, for example, in the coming quarters."

"Furthermore, the 3-month annualized core inflation rate stands at nearly 3% – and is thus above the year-on-year rate (Chart 2). This is another indication of a rising core rate in the coming months. By the middle of next year, the core rate could even climb above 3%."

"This would exceed the ECB's expectations, thereby increasing the risk of another interest rate hike next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)