Euro-zone Final HICP (Sep.)

Inflation will rise further before it comes back down

  • Euro-zone inflation looks set to climb further in the coming months as higher input and energy costs feed through. An unusually cold winter would put even more upward pressure on gas prices in the short term, but we still think that headline and core inflation will fall sharply next year to well below 2%.
  • Data published this morning confirmed that euro-zone headline inflation rose to 3.4% in September, with nearly half of that due to energy. The inflation rates of energy items linked to oil, such as petrol and diesel, have probably peaked. But the high level of wholesale gas prices suggests that further increases in household energy inflation are likely. (See Chart 1.)
  • And after hitting 1.9% in September, core inflation is likely to keep rising too. After all, recent increases in core inflation haven’t all been due to base effects related to VAT in Germany. Eurostat’s measure of core inflation at constant tax rates rose to 1.4% in September, it highest level since January.
  • The re-opening of the hospitality and tourism sector has driven up services inflation, with restaurant inflation reaching a nine-year high in September. Package holiday and accommodation inflation also rose (see Chart 2), and since prices remain below 2019 levels, there is room for them to rise further.
  • September’s fall in core goods inflation was due to the reversal of a base effects-driven jump in clothing and footwear inflation in August. Global supply problems continued to put upward pressure on car and furniture inflation (see Chart 3), and the drop in auto inventories in September will add to price pressures.
  • However, we still think that these effects are temporary. Inflation in the tourism sector should slow once the level of prices has returned to something like its pre-crisis trend. And while it is difficult to know how long supply problems will last, they won’t be permanent. In the US, rising rental inflation is seen as a sign that the strength of the labour market is generating price pressures that could be persistent. So far at least, rent inflation in the euro-zone has remained very low. (See Chart 4.)

Chart 1: European Gas Prices & Contribution of Electricity, Gas & Heating to HICP Inflation

Chart 2: Accommodation Services
& Package Holiday Prices (% y/y)

Chart 3: Motor Vehicles & Furniture Prices (% y/y)

Chart 4: Rents (% y/y)

Sources: Refinitiv, Capital Economics

Jack Allen-Reynolds, Senior Europe Economist,

Jack Allen-Reynolds Senior Europe Economist
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