As expected there was a jump higher for inflation in the Eurozone in September. The flash Eurozone HICP reading showed core inflation jumping to +1.9% (from +1.6% in August) and headline inflation up to +3.4% (from +3.0% a month ago). 

The increase in core inflation came as the consensus had forecast, but the headline reading was slightly higher than analyst forecasts (at 3.4% versus 3.3% expected).

EZ inflation

Inflation has soared in recent months with both core and headline rates at levels not seen since 2008. A +17.4% jump in energy prices is a key factor in the headline increase.

What does this mean?

The increase in core inflation will be of particular interest to the ECB which recently increased its 2021 inflation expectation from +1.9% to +2.2%. Inflation is still expected to moderate in 2022 but the pace of the increase will be a concern considering the supply chain bottlenecks that have been a feature in recent months. Insistence on inflation being “transitory” is the continued assertion. However, many more months like this and the ECB will be asking itself some serious questions of whether the whole €1.850bn PEPP programme should be fulfilled.

Initial Market Reaction

The jump in inflation has been anticipated and only a marginal upside surprise in the headline seems to have done little to shift markets. German Bund yields are marginally lower, with the 10-year Bund yield falling by half a basis point.

There has been a slight strengthening of EUR against USD, but slipping marginally against GBP.