Same oil shock, very different inflation: Italy 5.6%, Germany 2.8%

What happened

The four largest euro-area economies published their first estimates of October inflation on 30 and 31 October, and the gap between them widened sharply. On the harmonised measure used to compare EU countries, Italy's inflation jumped to 5.6%; its national measure rose to 5.4% from 4.2%, well above the 4.6% economists had expected. Energy prices in Italy were 31.4% higher than a year earlier.

France's harmonised rate rose to 3.8% (3.4% on its national measure, up from 3.1%), and Spain's held at 4.9%. Germany went the other way: its national inflation fell to 2.8% from 3.3%, below the 3.0% expected, mainly because a temporary cut in fuel taxes took effect on 1 October.

Why one shock produces different inflation rates

All four countries face the same world oil and gas prices. What differs is how quickly and how fully those prices reach households. In Italy, regulated energy tariffs reset to reflect wholesale costs, and they rose very steeply. In Germany, the government cut fuel duty, so drivers pay less tax on each litre even though oil is dearer. Spain's fuel was cheaper than a year earlier, which partly offset higher gas tariffs.

Taxes and price controls do not remove the cost of an oil shock; they move it. A fuel tax cut shifts part of the cost from households to the government's budget, and when the cut ends, prices can jump back. Economists quoted by Euronews warned that German energy inflation could rebound early next year if fuel duties rise again.

Why it matters for the ECB

The European Central Bank sets one interest rate for all 21 euro countries. It targets the euro-area average, which was 3.8% in September. A rate that suits Germany, at 2.8%, may be too low for Italy at 5.6%. That tension is built into a monetary union: countries cannot set their own rates, so differences in inflation have to be absorbed through budgets, wages and prices instead.

Where it sits in the chain

An oil shock enters at the start of the chain and becomes inflation (Link 1). How far that inflation spreads decides the central bank's response (Link 2), and the ECB held its rate at 2.5% on 29 October.

What to watch

• The euro-area flash estimate on 4 November.
• Whether core inflation, which leaves out energy and food, rises too: that would signal the shock spreading.
• The ECB's December meeting and its new forecasts.