Eurozone inflation: Still very much an energy story

Energy inflation rose to a new peak this year of 20.8% from 18.9% in September. While fuel prices are still the main drivers of the energy component, we expect – as in Italy this month – that in the coming months gas and electricity prices for households will move more meaningfully higher in response to the rise in wholesale prices.

Services inflation increased by 0.1pp to 3.3% y/y in October, against our expectation for a small move lower. Alongside higher food inflation, this explained the bulk of the upside surprise in headline inflation. While we don’t yet have the full aggregate eurozone breakdown, national releases suggest this partly reflects an increase in travel related services, led by transport and accommodation rises in France and Italy – likely due to higher energy costs passing through. Goods price inflation (NEIG) in October also rose by 0.1pp to 1.2% - a bit less than we expected. All told, core inflation was unchanged at 2.5% y/y for October, in line with our forecast.

Food inflation picked up this month, from 1.3% y/y in September to 1.6% in October. This uptick came mainly from unprocessed food supply pressures, as heatwaves and drought negatively affected harvests (see here). This appears to be a concentrated increase in Italy, and not a widespread synchronised rise across the major Eurozone economies.

On a country-level basis, inflation declined in Germany from 3.3% y/y in September to 2.8% y/y in October due to a renewed fuel tax cut by the government for petrol and diesel. However, this was largely offset by increases in the eurozone’s other major economies. Italy saw the most dramatic rise from 4.2% to 5.6% in October, driven primarily by a sharp increase in utility bills, and to a lesser extent unprocessed food prices. France also recorded a 0.4pp increase, taking inflation up to 3.8% y/y – also due to elevated energy costs. Inflation in Spain remained elevated, but unchanged, at 4.9% y/y.

In the coming months we expect companies to continue slowly passing on higher energy costs to consumers. Wage growth and second-round effects remain subdued, though the ECB warned last week that the persistence of the shock could increase this risk. Our view is that second round effects will ultimately be contained. Inflation is expected peak above 4% in early 2027, before turning downwards thereafter. The ECB left interest rates unchanged at the Governing Council meeting last week. We expect two additional hikes over the coming months, taking the deposit rate to 3% (see here for more). (Bill Diviney & Adrian Quinn)

The Netherlands: Energy pushes inflation higher

The flash CPI for the Netherlands rose to 3.7% in October, up from 3.4% in September, in line with our expectations. The increase was largely driven by three factors.

First, industrial goods made a larger contribution, reflecting rising energy prices as well as the AI boom, which is creating shortages and pushing up prices. Second, energy inflation continued to rise on the back of higher energy prices, particularly for diesel and petrol, which pass through quickly to consumers. The increase remains more modest than during the previous energy crisis, as gas and electricity prices have risen much less and many households are protected by fixed energy contracts. Third, consumption abroad made a larger contribution to inflation. This is intuitive, as some households purchase products such as fuel abroad, and the contribution of these price changes to inflation is increasing.

Food inflation remained negative, but we expect it to pick up into 2027 as pressures on food prices build (read more here). Finally, services inflation remained benign, as expected.

All in all, we expect the pass-through of higher energy prices to the broader inflation basket to remain limited compared with the previous energy crisis. Nevertheless, we expect inflation to remain above 3% in both 2026 and 2027. (Aggie van Huisseling)