Euro zone inflation rises to higher-than-expected 2%, weakening case for jumbo rate cut

Key Points

• Inflation in the euro area rose from 1.7% to 2% in October, flash figures showed Thursday, coming in slightly higher than the 1.9% forecast.
• Core inflation and services inflation were both unchanged on the previous month.
• Markets currently expect the European Central Bank to cut interest rates by another 25 basis points in December, with one analyst saying the latest data would end debate over whether a larger 50-basis-point cut is warranted.

Inflation in the 20-nation euro zone rose to 2% in October, preliminary figures released by statistics agency Eurostat showed Thursday.

Economists polled by Reuters had forecast a headline figure of 1.9%. The September headline reading was revised down to 1.7% from 1.8% on Oct. 17, below market expectations.

The biggest upward pull in the headline rate came from food, alcohol and tobacco, where price rises accelerated to 2.9% from 2.4%.

Core inflation, which excludes those volatile components along with energy prices, was unchanged at 2.7%, slightly higher than the 2.6% expected. Services inflation — an important gauge of domestic price pressures — also held steady at 3.9%.

The euro was up 0.15% against the U.S. dollar following the release, trading at a two-week high of $1.087.

The fresh Thursday inflation print was seen as crucial in judging whether the European Central Bank could consider implementing a jumbo half-percentage-point cut in interest rates at its next meeting in December.

The central bank has so far trimmed rates three times this year, in quarter-point increments that altogether took the central bank's key rate from 4% to 3.25%.

Markets are currently pricing another 25-basis-point reduction in December.

Euro zone growth

Traders are also considering the latest growth figures for the euro area, which showed better-than-expected 0.4% expansion in the third quarter, even as analysts predicted further weakness ahead.

The ECB said during its October meeting that the process of disinflation was "well on track" and that sluggishness in the euro zone's economic activity had added to its confidence that inflation will not resurge dramatically.

"Hotter eurozone inflation, stronger growth and record low unemployment wipe out bets for a 50 [basis point] cut," Kyle Chapman, foreign exchange market analyst at Ballinger Group, said in a note.

Chapman said that, while an uptick in consumer price growth was expected toward the end of the year, services inflation remained sticky.

"A big concern underpinning the risks of inflation undershooting the target was a potential tipping point with the labor market, the surprising resilience of which could be at risk of a sharp unwind in labor hoarding if consumption worsens. That concern is no longer so significant," Chapman stressed, pointing to this week's growth and employment figures.

"Back-to-back 25 [basis point] moves are the way to go. The need for below-neutral rates to rescue a contracting eurozone economy is fading from the discussion, and that negates the need to hurry the easing cycle, particularly with services inflation struggling to come unstuck."

Read more

Inflation undershoots to jumbo cuts: What 10 European Central Bank members said this week
Another European Central Bank member says a jumbo cut is on the table
Euro zone growth hits two-year high of 0.4%, beating expectations