European inflation has hit 3.8 per cent, its highest level in three years. Rising energy costs are driving the surge, complicating the ECB’s fight against inflation. Central bankers may need to raise interest rates at least once more before the year is out.

Final figures from Eurostat show annual inflation in September climbing to 3.8 per cent in both the EU and the eurozone, up from 3.2 per cent in August. A year earlier, inflation stood at 2.6 per cent across the EU and 2.2 per cent in countries using the euro.

Inflation varied widely across the bloc. Sweden recorded the lowest annual rate, at one per cent, followed by Hungary and Denmark at 2.1 per cent. At the other end of the scale, Romania had the highest inflation at 6.5 per cent, followed by Lithuania at 6.1 per cent and Bulgaria at 5.6 per cent.

Energy made the biggest contribution to eurozone inflation, adding 1.71 percentage points. Services accounted for another 1.52 points. Non-energy industrial goods, food, alcohol and tobacco made smaller contributions.

Middle East conflict fuels price surge

The sharp rise in prices stems primarily from more expensive oil and natural gas amid the conflict in the Middle East. Energy costs are once again putting inflation under pressure, just as the European Central Bank (ECB) tries to keep price rises in check.

Nor is the pressure confined to energy. Core inflation in the eurozone, which excludes volatile items such as energy, food, alcohol and tobacco, rose to 2.5 per cent in September from 2.4 per cent in August. Services inflation also picked up, climbing from 3 per cent to 3.2 per cent.

Core inflation offers central bankers an important signal. If higher energy costs feed more heavily into the prices of other goods and services, bringing inflation back to target could prove harder.

IMF expects another rate rise

The International Monetary Fund (IMF) said on Friday that the ECB would need to raise interest rates at least once more this year, by a quarter of a percentage point. The Fund argues that further monetary tightening is needed to keep underlying inflationary pressures in check.

The ECB has already raised rates twice this year, in June and September, by a quarter of a percentage point each time. Its deposit rate reached 2.50 per cent in September.

The IMF stressed that the next steps in monetary policy would depend on incoming economic data. Further tightening may be necessary to bring inflation back to target in 2028, it said.

The Fund also warned that governments could undermine efforts to curb inflation if they make support for households and businesses hit by high energy costs too broad or poorly targeted.

September’s figures leave European policymakers facing a difficult balancing act: curbing further price rises without placing an unnecessary burden on households and businesses through higher borrowing costs.