Eurozone Inflation Rate Rises to 10.7% as Recession Looms

Europe has had to look elsewhere for gas supplies, and paid much higher prices. While storage levels are now high, and gas prices on world markets have fallen from their peaks, household energy bills lag behind those moves and are much higher than a year earlier, as are food prices.

As a result of these pressures, inflation in the region has overtaken the level in the U.S. Now it is fueling demand for higher pay in the most affected countries, which could in turn feed into further price rises.

The European Union’s statistics agency Monday said consumer prices were 10.7% higher in October than a year earlier, the fastest rate of increase since records began in 1997, two years before the euro was launched. However, national records go back further, and Germany’s measure of inflation was the highest since December 1951.

Economists had expected to see a pickup in inflation during October, but not one that was as large as Eurostat reported. Economists surveyed last week by The Wall Street Journal saw a rise to 10% from 9.9% in September.

As measured by the Eurostat method, Italy’s annual rate of inflation jumped to 12.8% in October from 9.4% in September, while Germany’s inflation rate rose to 11.6% from 10.9%. By contrast, Spain’s inflation rate fell to 7.3% from 9%.

The surprise jump in inflation underlines the challenges facing ECB policy makers as they confront a likely recession in the eurozone. The central bank raised its key interest rate to 1.5% from 0.75% Thursday, but signaled mounting concerns about economic growth.

Investors, watching closely for signs that central banks such as the Federal Reserve will pivot away from large interest-rate increases, took those comments to mean that the ECB could soon ease back on rate rises. The surge in inflation raises doubts about that expectation.

“This raises the question of whether the talk of an ECB ‘pivot’ that followed Thursday’s meeting is premature,” said Paul Hollingsworth, an economist at BNP Paribas.

Yields on eurozone government bonds rose Monday, as investors expected that the ECB would have to raise interest rates further to tame inflation. The yield on the benchmark German 10-year bund rose to 2.149% from 2.077% Friday. The yield on Italy’s benchmark 10-year bond rose to 4.253%, from 4.141% Friday.

Eurostat said energy prices were 41.9% higher in October than a year earlier, while food prices were up 13.1%. But the core rate of inflation, which excludes those volatile items, also picked up to 5% from 4.8% in September.

The outlook for inflation depends on the availability of gas supplies through the winter months, and average temperatures, as well as government measures to protect households from hardship. Many eurozone governments have introduced price caps that directly limit inflation.

The rise in living costs has triggered a wave of protests across Europe, testing the resolve of governments that have so far maintained unity in their costly economic war with Russia.

In Germany, record inflation has caused tension between German employers and trade unions, who have traditionally cooperated relatively smoothly, particularly during crises.

The influential IG Metall union, which represents some 2.2 million industrial workers, has demanded an 8% pay increase over 12 months to compensate for surging consumer prices. Its members started warning strikes over the weekend after failing to reach an agreement with employers.

“Growth can only be distributed if it exists,” said Stefan Wolf, President of the Employers’ Confederation in the Metal and Electrical Industry.

High energy prices have been a headwind for the eurozone economy this year because they leave households with less to spend on goods and services that are produced inside the currency area, while raising costs for businesses, and particularly energy-intensive factories.

However, separate figures released by Eurostat Monday showed the eurozone economy continued to grow in the three months through September, albeit at a slower pace than in the previous quarter. The statistics agency said the combined gross domestic product of the 19 countries that use the euro was 0.7% higher than in the three months through June when annulaized, a slowdown from the 3.3% growth recorded in the second quarter.

With energy use set to rise as cold weather spreads across the currency area, most economists expect its economy to contract in the final three months of the year, and in the early months of next year. The ECB will update its own forecasts in December, when policy makers will have to decide whether to push ahead with another big rate raise, or moderate the pace of tightening.

—Tom Fairless and Caitlin Ostroff contributed to this article.

Write to Paul Hannon at [email protected]

Europe has had to look elsewhere for gas supplies, and paid much higher prices. While storage levels are now high, and gas prices on world markets have fallen from their peaks, household energy bills lag behind those moves and are much higher than a year earlier, as are food prices.

As a result of these pressures, inflation in the region has overtaken the level in the U.S. Now it is fueling demand for higher pay in the most affected countries, which could in turn feed into further price rises.

The European Union’s statistics agency Monday said consumer prices were 10.7% higher in October than a year earlier, the fastest rate of increase since records began in 1997, two years before the euro was launched. However, national records go back further, and Germany’s measure of inflation was the highest since December 1951.

Economists had expected to see a pickup in inflation during October, but not one that was as large as Eurostat reported. Economists surveyed last week by The Wall Street Journal saw a rise to 10% from 9.9% in September.

As measured by the Eurostat method, Italy’s annual rate of inflation jumped to 12.8% in October from 9.4% in September, while Germany’s inflation rate rose to 11.6% from 10.9%. By contrast, Spain’s inflation rate fell to 7.3% from 9%.

The surprise jump in inflation underlines the challenges facing ECB policy makers as they confront a likely recession in the eurozone. The central bank raised its key interest rate to 1.5% from 0.75% Thursday, but signaled mounting concerns about economic growth.

Investors, watching closely for signs that central banks such as the Federal Reserve will pivot away from large interest-rate increases, took those comments to mean that the ECB could soon ease back on rate rises. The surge in inflation raises doubts about that expectation.

“This raises the question of whether the talk of an ECB ‘pivot’ that followed Thursday’s meeting is premature,” said Paul Hollingsworth, an economist at BNP Paribas.

Yields on eurozone government bonds rose Monday, as investors expected that the ECB would have to raise interest rates further to tame inflation. The yield on the benchmark German 10-year bund rose to 2.149% from 2.077% Friday. The yield on Italy’s benchmark 10-year bond rose to 4.253%, from 4.141% Friday.

Eurostat said energy prices were 41.9% higher in October than a year earlier, while food prices were up 13.1%. But the core rate of inflation, which excludes those volatile items, also picked up to 5% from 4.8% in September.

The outlook for inflation depends on the availability of gas supplies through the winter months, and average temperatures, as well as government measures to protect households from hardship. Many eurozone governments have introduced price caps that directly limit inflation.

The rise in living costs has triggered a wave of protests across Europe, testing the resolve of governments that have so far maintained unity in their costly economic war with Russia.

In Germany, record inflation has caused tension between German employers and trade unions, who have traditionally cooperated relatively smoothly, particularly during crises.

The influential IG Metall union, which represents some 2.2 million industrial workers, has demanded an 8% pay increase over 12 months to compensate for surging consumer prices. Its members started warning strikes over the weekend after failing to reach an agreement with employers.

“Growth can only be distributed if it exists,” said Stefan Wolf, President of the Employers’ Confederation in the Metal and Electrical Industry.

High energy prices have been a headwind for the eurozone economy this year because they leave households with less to spend on goods and services that are produced inside the currency area, while raising costs for businesses, and particularly energy-intensive factories.

However, separate figures released by Eurostat Monday showed the eurozone economy continued to grow in the three months through September, albeit at a slower pace than in the previous quarter. The statistics agency said the combined gross domestic product of the 19 countries that use the euro was 0.7% higher than in the three months through June when annulaized, a slowdown from the 3.3% growth recorded in the second quarter.

With energy use set to rise as cold weather spreads across the currency area, most economists expect its economy to contract in the final three months of the year, and in the early months of next year. The ECB will update its own forecasts in December, when policy makers will have to decide whether to push ahead with another big rate raise, or moderate the pace of tightening.

—Tom Fairless and Caitlin Ostroff contributed to this article.

Write to Paul Hannon at [email protected]