Euro-area inflation hits 4%, a three-year high. Core prices have not followed, yet

What happened

Consumer prices in the euro area were 4.0% higher in October than a year earlier, up from 3.8% in September, according to Eurostat's first estimate on 4 November. That is the highest rate in three years and matched economists' forecasts. Energy, especially diesel and natural gas, was the main driver, and food prices kept accelerating.

Core inflation, which excludes energy, food, alcohol and tobacco, held steady at 2.5%. Services inflation edged up to 3.3% from 3.2%. Behind the average, national rates ranged from 2.8% in Germany to 5.6% in Italy on their first estimates, as we explained here.

Why the gap between headline and core matters

Headline inflation tells you what people pay. Core inflation strips out the most volatile prices to show the underlying trend. When headline rises and core does not, the pressure is coming mostly from energy and food, prices set on world markets. A central bank cannot make oil cheaper, so it usually looks through such a rise.

What it cannot ignore are "second-round effects": firms raising other prices to cover higher energy bills, and workers asking for higher pay to keep up. That is how a temporary shock becomes lasting inflation. Services inflation, driven largely by wages, is the first place it tends to show, and its small rise is why the ECB is watching closely.

Why the ECB may still raise rates

The ECB has raised its deposit rate twice this year, to 2.5%, and held it last week. Several policymakers, including the heads of the German and Italian central banks, have signalled that another rise in December is likely, Reuters reported. The worry is timing: inflation is expected to rise further in the coming months, and the longer it stays near 4%, the greater the risk that expectations shift.

Where it sits in the chain

An oil shock enters at the start of the chain and becomes headline inflation (Link 1). Whether it spreads into core prices decides how far the central bank responds (Link 2).

What to watch

• Services and core inflation in November's figures.
• Wage settlements in Germany and other large economies.
• The ECB's December meeting and its new forecasts.