TLDR:
- Euro zone inflation fell to 1.8% in September, below the ECB’s 2% target
- Core inflation rate came in at 2.7%, slightly below forecasts
- ECB President Lagarde expressed confidence in inflation returning to target
- Some economists now expect an ECB rate cut in October
- The drop in inflation could pave the way for faster interest rate cuts
Inflation in the euro zone has fallen below the European Central Bank’s (ECB) 2% target for the first time in over three years.
According to flash data released by Eurostat, the statistical office of the European Union, inflation in the 20 countries using the euro currency dropped to 1.8% in September, down from 2.2% in August.
This decline in inflation marks a pivotal moment for the European economy, as it represents a return to the ECB’s long-standing inflation goal. The last time inflation hit the 2% target was in June 2021, when it stood at 1.9%. The recent drop is largely attributed to falling energy prices, which have provided relief to consumers after a period of high inflation that at one point reached double digits.
The core inflation rate, which excludes more volatile components such as energy, food, alcohol, and tobacco prices, came in at 2.7% in September.
This figure was slightly below economists’ forecasts and down from 2.8% in August. Services inflation in the euro zone also eased slightly, dropping to 4% from 4.1% in the previous month.
The inflation data aligns with recent trends observed in key euro zone economies. Both France and Germany reported inflation rates below the 2% target in September, with Germany’s harmonized inflation rate dropping more than expected to 1.8% on an annual basis.
ECB President Christine Lagarde addressed these developments in a recent hearing at the European Parliament’s Committee on Economic and Monetary Affairs. Lagarde expressed growing confidence in inflation returning to the 2% target in a timely manner. She acknowledged that inflation might temporarily increase in the fourth quarter of 2024 as previous sharp falls in energy prices drop out of the annual rates.
However, she emphasized that the latest developments strengthen the ECB’s confidence in achieving its inflation target.
The decline in inflation has prompted some economists to revise their expectations regarding future ECB policy actions. Bank of America Global Research economists have changed their forecast, now anticipating a rate cut in October rather than holding rates steady.
Deutsche Bank economists have also moved up their forecast for the next ECB rate cut from December to October.
Market data from LSEG showed that investors were largely pricing in a 25-basis-point cut in October, indicating a shift in expectations for monetary policy.
The drop in inflation comes at a time when the ECB must balance the need to ensure inflation remains under control with concerns over slow economic growth. Higher interest rates, while effective in combating inflation, can also slow economic activity by making borrowing more expensive for consumers and businesses.
The ECB, along with other major central banks like the U.S. Federal Reserve, had previously raised rates rapidly to combat the burst of inflation that followed the economic rebound from the pandemic and the energy price shock caused by Russia’s invasion of Ukraine.
With these inflationary pressures easing, central banks are now cautiously considering rate cuts to support economic growth.
All eyes will be on the ECB’s next monetary policy meeting on October 17.
