Eurozone inflation surge surprises, ECB may raise rates

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A faster-than-expected inflation jump across the eurozone’s biggest economies raises the odds that the European Central Bank will hike interest rates again this year to bring price growth down to target.

The move would add to economic headwinds and sovereign borrowing costs at a time when governments are already grappling with the highest yields since the 2012 sovereign debt crisis.

Wednesday’s preliminary data showed inflation in Germany jumped to 3.3% in September, from 2.9% in August. In France, inflation jumped to 3.4% from 2.6%, and in Italy to 4.1% from 3.2 percent. Spain reported inflation of 5% on Tuesday, up from 4.6%.

The numbers all came in above forecasts and hit multi-year highs.

The increases were driven in large part by energy prices as the Middle East conflict continues to disrupt oil and gas markets. The ECB has raised rates twice this year, bringing its deposit rate to 2.5% in September.

The next step is considered more challenging as it could push rates from the upper end of neutral into restrictive territory, where they begin to slow economic activity.

Higher rates are also lifting government borrowing costs. Sovereign yields have reached their highest levels since the 2012 debt crisis, adding pressure to public finances.

France has seen the steepest increase in its borrowing cost among eurozone member states as investors demand an additional premium for holding its debt, given massive fiscal and political uncertainty in the run-up to French presidential elections.

The level could still rise should investors be disappointed by the hotly awaited budget announcement in Paris on Thursday.

Eurostat will release inflation numbers for the 21-nation euro zone as a whole on Friday.