Europe's Inflation Is Speeding Up as France's Borrowing Costs Climb, Showing Global Nature of the Problem

While most American attention Friday went to a weak jobs report, a quieter story was playing out across the Atlantic that I think deserves more of it. Inflation in the eurozone came in hotter than expected for September, driven by energy. At the same time, the French government's borrowing costs have climbed to levels not seen in more than two decades, as a divided parliament takes up another austerity budget.

Annual inflation in the countries that use the euro rose to 3.8% in September from 3.2% in August, according to the flash estimate Eurostat released Friday. Prices rose 0.6% in the month alone. Economists had expected 3.6%, according to a consensus cited by MarketScreener.

Energy did most of the damage, up 18.8% from a year earlier, compared with 14.3% in August. That is the same oil and refined-fuel pressure tied to the Middle East conflict that has been rattling markets here. Core inflation, which strips out energy, food, alcohol and tobacco, edged up to 2.5% from 2.4%, and services inflation rose to 3.2% from 3%. Spain was at 5%, Italy at 4.1% and Germany at 3.3%. In France, the national statistics agency, INSEE, put harmonized inflation at 3.4%, up from 2.6% in August.

That is not runaway inflation. But it is the highest monthly reading in Eurostat's table since at least April, and it is moving the wrong way for the European Central Bank, which has already raised rates twice this year, in June and again in September, lifting its deposit rate to 2.5%. Eurostat publishes full September figures Oct. 16.

France's 10-year bond yield reached its highest level since 2002 this week, close to 5%, the Italian financial daily Il Sole 24 Ore reported Thursday. The gap between French and German 10-year yields, a measure of how much more investors demand to lend to Paris than to Berlin, touched about 1.5 percentage points at one point Friday, the widest since the 2012 euro debt crisis, the French financial daily L'Agefi and TokenPost reported.

The cause is fiscal and political, not any single decision. Prime Minister Sébastien Lecornu's government has proposed a 2027 budget that seeks about 54 billion euros in savings to bring the deficit down to 5% of economic output next year, from a projected 5.4% this year. It has to get that through a divided National Assembly, and investors have watched French budgets stall there before.

That matters beyond France's borders. France is the eurozone's second-largest economy, and when its bonds trade too far from Germany's, it revives memories of the debt crisis that nearly broke the currency union more than a decade ago. The ECB does have a backstop built for a disorderly selloff, the Transmission Protection Instrument it created in 2022, but leaning on it for France would be a political fight of its own.

Global bond markets don't operate in silos. Investors managing money across borders compare returns everywhere, and rising yields in Europe add upward pressure on yields here, including the Treasury yields that help set the price of a 30-year mortgage in New York. The 10-year Treasury yield was above 5% Friday, near multiyear highs. Fed Vice Chair Philip Jefferson noted in a speech Thursday that yields had risen further across maturities since the Fed's September meeting. Freddie Mac's average 30-year fixed mortgage rate jumped to 7.28% this week, from 7.03% a week earlier.

The energy link is just as direct. The oil and diesel prices pushing Europe's inflation up are the same ones drivers pay on Sunrise Highway. Energy is a global market, and a supply shock more than 3,000 miles away still shows up at the pump in Bay Shore.

None of this calls for alarm on Main Street. European political crises have flared before without spreading into global contagion. But reaccelerating inflation and political strain in a major Western economy are arriving while the Fed, which raised rates in September, weighs whether it needs to go again. That adds one more reason borrowing costs aren't likely to fall quickly. For anyone planning a big purchase on the hope that rates will come down, the lesson from across the Atlantic matches the one at home: plan for patience, not certainty.