Eurozone inflation soars to 4%, twice the central bank's target! Lagarde signals tightening, Nagel says another rate hike may still be needed next month.

Note that eurozone inflation accelerated to twice the ECB's target, providing grounds for further rate hikes. Eurostat reported on Wednesday that consumer prices rose 4% year-on-year in October, up from 3.8% the previous month. This is the highest level since September 2023 and in line with the median estimate in a survey. Core inflation, which excludes items such as energy (energy is the main driver of the current round of price pressure), held at the expected 2.5%, while the services indicator edged up to 3.3%. Eurozone inflation is now twice the ECB's target Although the ECB kept borrowing costs unchanged last month, officials have signaled that they are prepared to raise rates for the third time since the outbreak of the Iran war if the price outlook does not improve. President Lagarde has said the policy direction is "clear and unambiguous," and several Governing Council members said this week that holding steady in October does not mean monetary tightening is over. Bundesbank President Joachim Nagel went further, saying that if the inflation situation does not improve, another rate hike will likely be needed next month. Investors and analysts expect the ECB to act in December, when the latest quarterly projections will provide a fuller picture of the health of the 21-nation eurozone economy. The former expect the deposit rate to rise from the current 2.5% to 3% or higher next year. David Powell, senior eurozone economist, said: "Although eurozone inflation surged to 4% in October, the broader conclusion of this report is that the energy shock has lasted more than six months while underlying price pressures remain moderate. At its October meeting, the ECB emphasized the fact that pass-through from higher energy prices to core inflation has been limited. This further supports our view that the Governing Council is approaching the end of this hiking cycle after a final rate hike in December." So far, inflation remains confined to energy. But the ECB is staying vigilant, hoping to prevent the shock from spreading through sharp increases in wages and corporate selling prices. Its internal wage tracker shows that wage growth will slow significantly in 2027. The key question is how much tightening the 21-nation economy can withstand. So far, it has weathered the shock of the Middle East conflict well, having previously withstood Trump's tariffs. In the third quarter, the economy overcame France's fiscal and political difficulties and grew more than expected. However, another ECB rate hike would push rates to the top of a range considered to have benign economic effects. Other headwinds include rising global bond yields and low natural gas storage levels at the start of winter.