Eurozone PMI hits 41-month high as inflation pressures mount

• Eurozone September final services PMI came in at 53.0, matching the preliminary reading
• That compares with 51.6 in the prior month
• Eurozone September final composite PMI stood at 53.1, also in line with the flash estimate
• The previous reading was 52.0

What the figures showThe final numbers confirm what was already indicated by the initial estimates — private sector business activity expanded at its fastest pace in nearly three and a half years.

This occurred alongside continued demand improvement in September, rounding out a full quarter of growth. The rate of expansion reached a 41-month high overall.

Growth was widespread across the region, with output rising at a faster clip in both manufacturing and services toward the end of the third quarter. A similar pattern was seen at the country level, as all five nations with available Composite PMI data recorded expansion — the first time that has happened since November of last year.

Still, price pressures continued to mount in September. Input cost and output charge inflation both accelerated at a sharp pace, though they remained below the peaks recorded in May:

That will keep the European Central Bank concerned on inflation, especially after consumer prices had already risen to almost 4% last month. The pressure will remain as markets debate whether core inflation might also begin to accelerate. If that happens, it would become more difficult for the ECB to treat the current situation as largely driven by an energy price shock.

What the data tracksThe services PMI measures business activity in the euro area's services sector, while the composite PMI brings together services and manufacturing for a broader view of private sector economic performance. A figure above 50 signals expansion, and a number below 50 indicates contraction.

Why markets carePMI surveys rank among the earliest monthly indicators of how the eurozone economy is performing. The September flash numbers drew particular attention because they pointed to growth accelerating rather than slowing, with the survey suggesting the findings were consistent with quarterly GDP growth of about 0.4%.

Broader economic contextThe picture increasingly shows stronger growth accompanied by stronger inflation pressure. Business activity improved in both manufacturing and services in September, new orders picked up, and employment edged higher. At the same time, firms reported faster increases in both costs and selling prices.

So rather than weaker growth helping the ECB contain inflation, the latest data indicate that the economy is holding up relatively well even as price pressures increase.

Possible market impactA stronger final reading, especially if it comes with more evidence of rising prices, would reinforce expectations that the ECB may need to tighten policy further. That would generally support the euro and could push European bond yields higher. But since these are final estimates, a sizable surprise would be needed to really move markets. Otherwise, the impact should be largely minimal.

Current relevance for marketsHigh. The ECB finds itself caught between resilient economic growth and a renewed acceleration in inflation, meaning the PMI data directly feed into the debate over further rate hikes.