A surge in euro zone inflation in October beat all expectations, data showed, raising the odds for a rise in European Central Bank interest rates despite weakening sentiment and sending the euro up against the dollar.
European Union statistics office Eurostat estimated consumer prices in the 13 countries using the euro rose 2.6 percent year-on-year, up from 2.1 percent in September and well above the ECB's target of just below 2 percent.
The estimate, containing no detailed breakdown or month-on-month data, was higher than all 47 forecasts in a Reuters poll of economists, which gave a range of 2.2-2.5 percent.
The jump was likely to have stemmed from food prices, whose sharp increases came on top of energy-related base effects.
"That of course will be more important for the hawks at the ECB than the modest slippage we are seeing in industrial and consumer confidence," said Holger Schmieding, co-head of European economics at Bank of America.
With the U.S. Federal Reserve expected to cut rates and rampant euro zone inflation raising chances of an ECB hike, the euro rose against the dollar to $1.4448 from $1.4426.
The European Commission's business and consumer confidence monthly survey showed, however, that consumer inflation expectations, which are closely watched by the ECB, eased in October as economic sentiment deteriorated further.
Consumer inflation expectations 12 months ahead fell to 26 points from 28 in September and selling price expectations among producers remained stable, the survey showed.
Economic sentiment in the euro zone took another hit in October, declining to 105.9 from a downwardly revised 106.9 in September and 110 in August.
The deterioration came from industry and the construction sector, where confidence fell this month, while sentiment among consumers and in the services sector stayed unchanged and even improved slightly in retail.
"The ECB is facing a massive juxtaposition on rates. Rising euro zone inflation suggests the need for higher rates, while plummeting economic confidence highlights the need for lower rates ahead," said David Brown, chief European economist at Bear Stearns International.
Markets are trying to guess whether the ECB's tightening cycle, which took interest rates to the current 4.0 percent from 2.0 percent in 2005, has come to an end as the euro zone economy slows amid more expensive credit, oil and the euro currency.
Economists said the bank was also likely to be concerned about the impact on inflation from the continued tightening of the euro zone labour market.
Eurostat revised upwards unemployment data for the euro zone since 2005 because of a switch to Labour Force Survey data in the euro zone's biggest economy, Germany, from the ILO monthly telephone survey.
But the overall trend for euro zone unemployment is still falling, with the unemployment rate for September at 7.3 percent, down from 7.4 percent in August.