The inflation alarm is intensifying in Europe. Eurostat’s preliminary estimate of euro area inflation marks a + 4.1% year-on-year in October, a marked increase compared to 3.4% in September and well beyond analysts’ expectations, who had forecast a rise to 3 , 7%. This is the highest level of inflation since July 2008. Looking at the individual components, in October energy showed the highest increase on an annual basis (23.5% compared to 17.6% in September). In the specific case of Italy, again due to expensive energy, inflation increased to 2.9%.
Core inflation also reaches alert levels, passing from 1.9% to 2.1%. “The energy inflation rate is now a remarkable 23.5% and consumer gas prices have yet to be fully incorporated into these numbers due to the contractual adjustments that don’t all happen immediately,” comments Bert Colijn, senior economist at Ing.
“With inflation above 4% and core inflation above 2% – continues the expert – the fertile ground for second round effects on inflation becomes more fertile. It remains to be seen whether is fertile enough for inflation to become structural, but the ECB will have to keep an eye on it. ”
Christine Lagarde said yesterday that the ECB is confident their analysis is correct on how temporary inflation is. “The market seems far from confident, as expectations are for a rate hike within the next 12 months,” added Colijn.