Euro zone inflation rises to 2% bolstering case for caution in rate cuts
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Euro zone inflation accelerated more than expected in October and could still pick up further in the coming months, bolstering the case for caution in European Central Bank (ECB) interest rate cuts as price growth is not yet fully tamed.
Inflation in the 20 countries sharing the euro currency accelerated to 2.0% from 1.7% in September mostly on higher food and energy costs, coming above expectations for 1.9% in a Reuters poll of economists.
A more closely watched figure which strips out volatile food and energy prices meanwhile held steady at 2.7%, above forecasts for 2.6%, Eurostat said on Thursday.
Inflation has fallen quickly since hitting double digit territory two years ago and most economists see it back at the European Central Bank's 2% target basis sometime in the first half of next year after some volatility in the final months of 2024.
This relatively quick return to target has also fuelled a debate in recent weeks, with some ECB officials arguing there was a growing risk that price growth will actually fall below target and the ECB will have to start stimulating growth to prevent excessively low inflation.
Such a dim outlook could even force the ECB to accelerate the pace of rate cuts and bolster the case for a bigger than usual step in December, some said.
This argument has yet to gain significant traction, however, and conservatives, or policy hawks in central bank-speak, have pushed back, arguing for measured, incremental steps because a long list of factors could still push prices higher.
A key concern is that inflation in services, the biggest single item in the consumer price basket remains way too fast, holding steady at 3.9%.
Wage growth is also faster than the 3% rate the ECB considers consistent with its target and households are sitting on ample savings, which could bolster consumer savings and overall growth.
The labour market also remains tight with the jobless rate holding steady at an all-time low of 6.3% in September, separate Eurostat data showed on Thursday.
The policy doves' argument that overall growth is simply too weak to sustain 2% inflation was also dealt a blow this week when fresh data showed the economy expanding at 0.4% in the third quarter, twice as fast as expected, with Germany, France and Spain all showing surprising resilience.
Meanwhile, Irish inflation has fallen to a three-year low with ongoing falls in energy costs leading to an almost 0% rise in general price levels.
New figures from the CSO show that falling inflation was largely driven by continued drops in energy prices, which have fallen by 13.5% in the 12 month period to October, despite a slight monthly increase of 0.3%.
However, food prices continue to rise, the CSO said, rising by 1.8% in the last year, with a slight hike of 0.4% in October.
Excluding energy and unprocessed food, inflation as measured by the HICP is estimated to have risen by 1.7% since October 2023, the CSO added.
Across the Euro area, economists appear to agree that no meaningful rebound in growth was likely and the euro zone will continue to grow at a lukewarm pace, below what is considered its potential.
That is why further ECB rate cuts are almost assured and no policymaker has challenged the need to move again on December 12, suggesting that the step is largely a done deal, unless major data surprises alter the outlook.
Financial investors are now betting that the ECB's 3.25% deposit rate could dip to 2% or possibly below that by the end of 2025.
The biggest uncertainty, however, is likely to be the U.S. election, policymakers say, since it could have far reaching implications for trade, growth and inflation which may require policy action further down the road.
Reporting from Reuters and the Irish Examiner.