Eurozone inflation hits 3.8%, core barely moves

Consumer prices in the euro area were 3.8% higher in September than a year earlier, up from 3.2% in August, according to Eurostat's flash estimate, its first and provisional reading (Eurostat). That is the fastest pace since September 2023 (CNBC). Energy prices jumped while the rest of the basket barely moved, and the European Central Bank meets on 29 October to decide what that split means for interest rates (ECB calendar).

The euro-area number confirms last week's national releases, when fuel costs pushed inflation in Germany, France, Italy and Spain above forecasts (To Brief).

Energy jumped, the rest crept

Energy makes up about 9% of the basket of goods and services Eurostat tracks. In September it cost 18.8% more than a year earlier, after a 14.3% rise in August (Eurostat). That category covers more than petrol and diesel. It also includes electricity, gas and heating fuel.

The jump varies by country. Energy inflation reached 14.9% in Germany and 22.3% in Italy (Destatis, Istat). Households that spend more of their budget on driving and heating will feel the rise more sharply than the euro-area average suggests.

Economists also track a narrower measure called core inflation. It leaves out energy, food, alcohol and tobacco, whose prices swing most, to show whether price pressure is spreading. Core inflation rose only to 2.5%, from 2.4% in August (Eurostat).

The signal in services

Within core, services deserve the closest look. Haircuts, restaurant meals and repairs depend heavily on wages. Price rises there can be the first sign that workers are winning pay rises to catch up with energy bills, and that firms are then raising prices to cover those wages. Economists call this a second-round effect.

Services inflation edged up from 3.0% to 3.2% in September (Eurostat). One month of prices cannot show whether wages are driving it, and these figures contain no wage data. ING's chief economist Bert Colijn said inflation was still mainly about energy, but that broader pressure was building if energy stays expensive (Yahoo Finance). In September, ECB staff projected that core inflation would peak at 2.8% in 2027 (ECB projections).

Who a rate rise would reach

The ECB has already moved once. On 10 September it raised its deposit rate by 0.25 percentage points to 2.50% (ECB). The deposit rate is what the ECB pays banks to park money overnight. It sets the floor for what banks charge each other to borrow, and from there it feeds into what they charge customers.

How fast that reaches a household depends on the type of mortgage. A variable-rate mortgage gets a new interest rate each time the contract hits a review date, often every few months or once a year. In much of the euro area that new rate is pegged to Euribor, the rate at which banks lend to one another, which moves with the ECB's own rate.

Finland and France sit at opposite ends. By May, 95% of Finnish mortgages were linked to Euribor (Bank of Finland). A Finnish family would see a higher payment at its next review date. In France more than 99% of mortgages carry fixed rates (Banque de France). Existing French homeowners would keep the payment they signed up for, and a rise would land mainly on people taking out new loans.

The flash figures show a sharp rise in energy prices and only a small rise in core inflation, though services edged up too. A rate rise works by slowing borrowing and spending over months. It does little to change what Europeans pay at the pump or for heating, because those prices come from global energy markets. If the ECB raises rates on 29 October, many Finnish borrowers would see higher mortgage payments at their next review date. Drivers would see no early relief on fuel (ECB calendar).