(Bloomberg) -- Euro-area inflation accelerated more than expected — matching the European Central Bank’s target and boosting arguments for gradual rate cuts.
Consumer prices rose 2% from a year ago in October, up from 1.7% the previous month and exceeding analysts’ estimates for a 1.9% increase, Eurostat said Thursday.
A smaller decline in energy costs was a major driver of the move. Closely watched core inflation, which excludes volatile items, unexpectedly held steady at 2.7%, while increases in food prices were faster.
The figures will support those ECB officials who’ve warned against outsized rate reductions to buoy the region’s sluggish economy. Investors have already pared wagers on a bigger cut to round off 2024, after growth figures on Wednesday showed the bloc on a firmer footing, with Germany dodging a recession.
Bonds held onto modest losses after Thursday’s data. The German 10-year yield was two basis points higher at 2.41%, around the highest since July, extending a three day losing streak. Traders are fully pricing a 25 basis-point ECB rate reduction in December.
The debate among policymakers about the path ahead has intensified in recent days. Several argued last week that a half-point move should be considered on Dec. 12 after business surveys pointed to worsening momentum in the private sector.
Others have pushed back. On Wednesday, ECB Executive Board member Isabel Schnabel said a “gradual” approach to monetary easing remains appropriate, while Bundesbank President Joachim Nagel said officials mustn’t rush further steps.
Nagel’s remarks followed news of a much bigger jump than anticipated in German inflation this month. It reached 2.4% from 1.8% in September — highlighting that challenges remain.
“The objective is in sight, but I am not going to tell you that inflation is under control,” President Christine Lagarde told Le Monde in an interview published Thursday. “We also know that inflation will rise in the coming months, simply because of base effects.”
There are other dangers. Wars in the Middle East and Ukraine could send energy and freight costs higher. Then there’s the potential return of Donald Trump — wielding a drastic package of trade tariffs — to the White House.
In Europe, meanwhile, pay rises are feeding inflation in the services sector. Price growth in that part of the economy was unchanged in October at 3.9%.
What Bloomberg Economics Says...
“Our base case remains that the ECB will make another rate cut in December, taking its deposit rate to 3%. Thereafter, we expect it to adopt a quarterly cadence as policymakers feel their way to neutral. Markets are pricing back-to-back cuts into next year and a terminal rate around 2%.”
—Jamie Rush, chief European economist. Click here for full REACT
The ECB stepped up the pace of easing this month as data pointed to softer economic growth and slower inflation. On Thursday, Italy’s Fabio Panetta warned of the risk that price growth falls short of 2%.
“Monetary conditions are still tight and new cuts will be necessary,” he said. “As inflation subsides, our focus should be on the sluggishness of the real economy: Without a sustained recovery, inflation risks being pushed well below the target.”
But while energy costs have been acting as a drag of late, officials only expect to sustainably meet the target next year. Part of the reason for that is the resilience of the euro area’s jobs market, with separate data Thursday showing that the unemployment rate was at a record-low 6.3% in September.
That may at least temper the concerns of policymakers who fear a sudden softening of the labor market with big job losses that could further dampen economic activity.
Latvian central-bank chief Martins Kazaks warned in October that “we risk approaching a tipping point” where staff hoarding is unwound due to a weak recovery.
“While usually without much significance, today’s unemployment reading, combined with stronger growth and hotter inflation, will provide yet another argument for the hawks in their battle about the pace of cuts,” said Kamil Kovar, an economist at Moody’s Analytics.
--With assistance from Mark Schroers, Joel Rinneby, Barbara Sladkowska, Simon Lee, Flavia Rotondi, Donato Paolo Mancini and Alice Gledhill.
(Updates with more on unemployment in final three paragraphs.)
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