Eurozone's September Inflation Rate Surges Above Target

The annual rate of consumer-price inflation in the euro zone surged in September, rising above the European Central Bank's 2% target for the first time in more than a year.

The annual rate of inflation across the euro zone was 2.1% in September, a preliminary estimate released by the European Union's official statistics agency Eurostat showed Friday. That means it has risen above the ECB's target of "below, but close to, 2%" for the first time since August 2006. The jump was expected by economists, who last week had forecast that energy-related base effects and rising food prices would push the rate of inflation higher. While a component breakdown isn't yet available, economists said it was likely that high oil prices were the main cause for the jump. But the rise is still likely to create a headache for the European Central Bank, which sets the interest rate in the 13 countries that share the euro. The bank had been on a tightening bias, repeatedly signaling that it thinks the risks to inflationary pressures are on the upside. However, recent turmoil in the financial markets caused havoc in the money markets and prompted the bank to leave its key interest rate on hold at 4.00% at its September policy meeting as it waits to assess the impact that the credit crunch has had on the real economy. And recent data have been mixed, which will make the decision all the more difficult. A range of measures of consumer and business confidence across the region have fallen, suggesting that the credit crunch is having an impact on the real economy. But other indicators, including Friday's inflation data, have remained buoyant, suggesting that the euro zone remained strong in the third quarter. Economists are divided over what the ECB's next move will be, with some saying a rate hike is on the back burner for the time being, while others think the ECB's Governing Council is minded to increase the key rate once more before the year end - to 4.25% from 4.00%. And the inflation data will give those in favor of a rise some ammunition. Germany, the euro zone's largest economy, reported a sharper than expected increase in its inflation rate Thursday, with the annual measure surging to 2.7% from 2.0%, the highest rate in nearly six years. "Signs of mounting inflationary pressures in the euro zone's largest economy will have done nothing to ease the ECB's fears regarding price stability," said Jennifer McKeown, an economist at London-based Capital Economics. "As such, we still think that there's a good chance of another rate hike, perhaps in November." Spanish inflation also spiked in September, accelerating to an annual rate of 2.7% from 2.2% in August, preliminary data from the National Statistics Institute showed Friday. Eurostat didn't give a breakdown of how prices changed over the month, but noted that the full breakdown of the September Consumer Price Index would be published Oct. 16. This is likely to be closely watched as it will give a clearer picture of what has caused the measure to surge this month.