Eurozone inflation spikes to 3.8%: Is your country on the worst list?

Eurozone inflation surged to 3.8% in September, the highest level in three years and surpassing economists' expectations of a 3.6% increase. The primary driver of the jump was energy costs, which accounted for nearly half of the inflation rate. According to Eurostat, prices rose 0.6% in September compared to August, marking the highest figure since September 2023 when inflation stood at 4.3%. This rate is also nearly double the European Central Bank's 2% target, which the ECB deems consistent with stable prices.

Core inflation, excluding volatile items like energy, food, alcohol, and tobacco, grew to 2.5% from 2.4%, matching forecasts. This leaves the ECB with a critical question: Is this an energy shock that will dissipate, or the beginning of broader price pressure?

Energy prices surged by 18.8% year-over-year, up from 14.3% in August, and inflation in September alone increased by 3.9%. Energy prices constitute around 9% of the euro area inflation basket. Services, the largest component of the basket at 47%, saw inflation rise to 3.2% from 3.0%, encompassing items such as rents, restaurants, travel, and insurance.

Food, alcohol, and tobacco prices increased by 1.4%, up from 1.1% in August, with unprocessed food prices jumping to 4.0% from 2.7%. Non-energy industrial goods, including cars, clothing, and household appliances, rose by 1.1%, a slight decrease from 1.2% in the previous month.

Among the euro area's 21 member countries, inflation exceeded 5% in six nations, including Lithuania at 6.1%, Bulgaria at 5.6%, Cyprus and Luxembourg at 5.2%, Greece at 5.1%, and Spain at 5.0%. Six other countries recorded inflation at or above the 3.8% euro area average. Malta had the lowest inflation rate at 2.4%, followed by Finland at 2.6% and Latvia at 2.9%.

Latvia was the only country where annual inflation declined in September. Italy and France experienced the most significant increases among major economies, with Italy's annual inflation rising to 4.1% and France's reaching 3.4%, surpassing Germany's 3.3%.

The ECB raised its key interest rates by 25 basis points on September 10, with the deposit facility rate now standing at 2.50%. This was the ECB's second rate hike this year, following a similar move in June. Higher interest rates make borrowing more expensive for households and companies, potentially slowing spending and easing pressure on prices.

The ECB's projections for 2026 anticipate average headline inflation of 3.0%, 2.5% in 2027, and 2.1% in 2028. Policymakers will meet on October 28-29 in Frankfurt, with the decision expected on October 29. The upcoming meeting will not include new staff projections, with the next set released in December. The September data puts fresh pressure on the ECB, as headline inflation remains above target and continues to rise, with prediction markets assigning a 91% chance of another rate hike at the end of the month.