Inflation accelerated faster than expected in all four of the Eurozone’s largest economies this month after tensions in the Middle East triggered a resurgence in fuel prices. In Spain the annual inflation rate jumped to 5 per cent from 4.6 per cent in August, while in Italy it rose by almost a full percentage point to 4.2 per cent from 3.3 per cent last month. In the Euro area’s largest economy, Germany, consumer prices increased by 3.3 per cent this month, up from 2.9 per cent in August and higher than the 3.2 per cent forecast by economists.

Annual inflation also rose faster in France than anticipated to 3.4 per cent. The renewed spike in global oil and natural gas prices is feeding rapidly into Eurozone inflation, with analysts warning inflation could average near 4 per cent by year-end. The bigger than expected rises could strengthen the case for further interest rate increases by the European Central Bank, which has a 2 per cent medium-term inflation target.

Traders have fully priced in another quarter-point increase in borrowing costs to 2.75 per cent by December, with a 40 per cent probability of a rise at the ECB’s next meeting in late October. For 2027, traders are pricing in almost three further quarter-point increases. ECB President Christine Lagarde said policymakers believe inflation will be longer-lasting than anticipated due to persistent disruption to oil and gas supplies from the war in the Middle East.

Oil prices surged back above $100 a barrel in the first half of this month, while European natural gas prices recently hit their highest level since the 2022 crisis triggered by Russia’s full-scale invasion of Ukraine. European diesel prices jumped last week after US President Donald Trump threatened to cut off exports. Eurostat will publish its flash estimate for the whole of the Eurozone on Friday, with economists expecting an annual inflation rate of 3.6 per cent, up 0.4 percentage points from August and the highest level in three years.