Italy's annual inflation rate jumped to 5.4% in October from 4.2% in September, preliminary Istat data showed, as energy prices rose 31.4% from a year earlier. France's rate climbed to 3.4% from 3.1%, while Germany's eased to 2.8% after a fuel tax cut.

The national figures, all published Oct. 30, set up Eurostat's flash estimate for the euro zone on Wednesday, Nov. 4, and will shape whether the European Central Bank raises rates in December. For Asian exporters the readings matter twice over: they affect demand from Europe's largest consumer markets and the path of the euro, which has lost ground against the yuan and the won since late summer.

Italy and France Drive the Rise

Italy recorded the sharpest jump of the four largest economies, returning inflation to its August 2023 level, Istat said. Economists had expected 4.6%, according to Euronews. On the harmonized European measure used by the ECB, Italian inflation reached 5.6%. Regulated energy prices were up 59.5% from a year earlier, while core inflation, which excludes energy and fresh food, rose to 2.0% from 1.6%.

In France, statistics office INSEE said energy prices rose 24.1% in the year to October, up from 21.3% in September and accelerating for a fourth straight month on gas and petroleum products. Services inflation picked up to 2.7% from 2.4%, led by accommodation and transport. On the harmonized measure, French inflation rose to 3.8% from 3.4%. Prices of manufactured goods, the category where Asian imports compete most directly, were still 0.2% lower than a year earlier.

Spain's rate held at 4.9%, statistics institute INE said, with core inflation at 3.1%. Cheaper motor fuel than a year earlier offset higher gas tariffs.

Germany was the exception. Destatis said consumer prices rose 2.8%, down from 3.3%, and fell 0.2% from September. Energy inflation slowed to 12.2% from 14.9%, which Euronews attributed mainly to a fuel tax cut that took effect Oct. 1 and runs to year-end. German core inflation eased to 2.1% from 2.4%, and services inflation to 2.5%.

Pantheon Macroeconomics raised its forecast for euro zone October inflation to 4%, double the ECB's 2% target, from a 3.8% reading in September, Euronews reported. BofA Global Research had expected 3.7% before the Italian data. Claus Vistesen, Pantheon's chief euro zone economist, said “France faces stagflation,” and said he expects French harmonized inflation to top 4% by November. He also warned that German energy inflation could rebound early next year if fuel duties go back up.

ECB Signals a December Move

The ECB held its deposit rate at 2.5% on Oct. 29, after raising it in September, and left a December hike on the table. At her news conference, President Christine Lagarde said the Governing Council would weigh two new inflation prints, fresh staff projections and third-quarter wage data before the December meeting. Unless significant developments contradict its current assessment, she said, “the direction of travel is clear.”

Growth gives the bank little cover. The euro zone economy grew 0.4% in the third quarter, but France contracted 0.1% and Italy did not grow. Paolo Grignani, senior economist at Oxford Economics, described the picture to Euronews as mixed with stagflationary tendencies and said he expects two more ECB increases.

What a Weaker Euro Means for Asian Exporters

Higher rates have not lifted the euro so far. ECB reference rates show the currency at $1.1216 on Nov. 2, up from $1.1130 on Oct. 29 but below the $1.1699 it fetched on Aug. 21.

The decline against Asian currencies has been steeper. The euro bought 7.4567 yuan on Nov. 2, compared with 7.8624 on Aug. 21, a drop of about 5%. Against the Korean won, it fell to 1,506.2 from 1,644.97 on Aug. 5, a loss of about 8%. The euro also traded at 177.1 yen, down from 185.92 in late August.

For Chinese, Korean and Japanese companies that invoice in euros, each euro of European sales now converts into less home currency. Raising euro prices to make up the gap is harder when households in France and Italy are spending more on energy. Pantheon's Melanie Debono, senior Europe economist, told Euronews the energy shock probably weighed more on consumer spending than monthly retail sales suggest.

A December hike could support the euro, but traders will first take their cue from Eurostat's flash estimate on Nov. 4. Final October data follow from Germany on Nov. 11 and France on Nov. 13.