Europe was supposed to be emerging from its inflation nightmare. Instead, the nightmare has apparently decided to return for a second act.

Eurozone inflation surged to 3.8 per cent in September, up sharply from 3.2 per cent in August and considerably above the 3.6 per cent economists had expected. It is now almost twice the European Central Bank’s 2 per cent target.

The immediate culprit is familiar: energy. Fuel and natural gas prices have been climbing sharply, while food costs are also beginning to exert pressure. Energy prices were reportedly 18.8 per cent higher than a year earlier in September, compared with a 14.3 per cent annual increase in August.

There is, however, a particularly awkward detail for the ECB. Inflation is not confined entirely to the petrol pump.

Core inflation — stripping out volatile food and energy prices — edged up from 2.4 to 2.5 per cent. Services inflation also rose to 3.2 per cent. That suggests the energy shock may gradually be finding its way into the wider economy, and that is precisely what central bankers fear.

An energy shock is unpleasant. An energy shock which becomes embedded in wages, services and business costs is considerably more troublesome. Once consumers and companies begin assuming that prices will continue rising, inflation can acquire a momentum of its own.

The ECB therefore finds itself facing the oldest monetary-policy dilemma in the book: raise interest rates and risk damaging economic growth, or hold back and risk allowing inflation to become entrenched.

It has already raised rates twice this summer. Its deposit rate currently stands at 2.5 per cent, and investors are contemplating as many as three further increases over the coming year. Yet markets are not expecting an October increase, with the next move not fully priced in until January.

That caution is understandable. Interest rates are a remarkably blunt instrument for dealing with an energy shortage. Raising the cost of borrowing cannot produce another cubic metre of natural gas or another barrel of oil. It can, however, make mortgages more expensive, discourage investment and squeeze companies already facing higher energy bills.

Europe has another problem: its public finances. Governments are under increasing pressure to cushion households and businesses from soaring energy costs. France has already seen street protests over fuel prices, while government support measures risk becoming another burden on national budgets already under considerable strain.

This creates an unpleasant feedback loop. Governments subsidise energy to protect consumers; deficits increase; bond markets demand higher yields; borrowing becomes more expensive; and households and businesses face another round of financial pressure.

France is an obvious danger point. The spread between French and German borrowing costs has risen to multi-decade highs, reflecting growing investor concern about French debt sustainability.

The ECB is consequently being asked to perform an increasingly improbable balancing act: suppress inflation without strangling growth, protect financial stability without appearing complacent, and somehow compensate for an energy shock over which it has virtually no control.

There is one reason for optimism. The underlying inflation numbers have not exploded. ECB policymaker Olli Rehn has pointed out that rising long-term interest rates themselves could restrain the transmission of higher energy prices into wages and other prices.

But that is hardly a comforting economic strategy. Europe is effectively relying on expensive money to prevent expensive energy from becoming even more expensive.

The danger is that policymakers discover they are always one crisis behind.

The eurozone’s inflation rate has already risen from 2.0 per cent at the beginning of 2026 to 3.8 per cent in September. Eurostat’s latest figures show just how rapidly the situation has changed.

If energy prices remain elevated into 2027, the ECB may have little choice but to tighten further.

Europe was promised an inflation victory. Instead, it has been handed yet another bill.