Europe Gets Hit by Another Energy-Driven Inflation Shock

A fresh energy-driven inflation shock is moving swiftly through consumer prices in parts of the euro area, with September data showing notable increases in southern Europe. Spain’s national statistics office reported that harmonized inflation rose to 5.0% from 4.6% in August, while the country’s domestic consumer price index increased 4.9%. Spain’s authorities singled out higher costs for fuels and lubricants as key contributors to the rise; core inflation in Spain was a more moderate 3.1%. Italy’s preliminary September figures sketch a comparable pattern: headline inflation accelerated to 4.2% from 3.3% the prior month. Istat’s release highlighted very large year-on-year jumps in energy components, with regulated energy up 25.9% and non-regulated energy up 22.2%. By contrast, Italian core inflation remained low at 1.7%, underlining a wide gap between headline and underlying price pressures. Analysts attribute the rapid pass-through of higher oil and fuel costs to Europe’s structural reliance on imported oil and natural gas. The current shock has been amplified by tight global supplies of middle distillates such as diesel, disruptions to refining and trade flows in the Middle East and Russia, and rising freight costs as replacement barrels compete for long-haul shipping. These factors have pushed diesel crack spreads—reflecting the premium of diesel over crude—markedly higher, raising both crude and refining-margin-related costs for consumers. The divergence between soaring energy components and much weaker core inflation is central to the policy debate at the European Central Bank. The ECB increased its three key rates by 25 basis points on Sept. 10, taking the deposit facility rate to 2.50%, and explicitly pointed to inflationary pressure from the Middle East conflict. ECB staff currently project headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, compared with the bank’s 2% medium-term target, but officials acknowledge significant uncertainty about how long the energy shock will last and whether it will spill over into wages and services. The immediate question for policymakers is whether the current episode will remain concentrated in energy prices or become more broadly entrenched in underlying inflation dynamics.