Inflation in the eurozone dropped to 1.8 percent in September which could lead to faster interest rate cuts from the European Central Bank (ECB).
Inflation fell below the ECB’s target of 2 percent for the first time in more than three years.
The decline has been driven primarily by falling energy prices and offers some respite for consumers following a period where inflation soared into double digits.
This latest official figure, released on Tuesday, along with the region’s sluggish economic growth outlook, could accelerate the ECB’s pace of interest rate cuts.
European flags flutter in front of the European Central Bank (ECB) building prior to a news conference following the meeting of the governing council of the ECB in Frankfurt/Main, Germany, on September 12, 2024. Inflation in the eurozone dropped to 1.8 percent in September which could lead to faster interest rate cuts from the ECB.
DANIEL ROLAND/AFP/Getty Images
The central bank has already reduced rates twice in response to the changing economic environment.
Eurostat, the European Union‘s statistics agency, reported that inflation fell from 2.2 percent in August.
The last time inflation was at the ECB’s 2 percent target was in June 2021, when it stood at 1.9 percent.
With inflation easing, economists are now contemplating the possibility of a rate cut at the ECB’s upcoming meeting on October 17.
Just weeks ago, most analysts expected the central bank to hold off on further rate reductions until December.
The ECB now faces the challenge of balancing the need to maintain inflation control by delaying rate cuts, against concerns over sluggish economic growth.
Higher central bank interest rates are typically used to combat inflation by raising borrowing costs across the economy, which in turn lowers demand for goods and helps moderate prices.
This approach also tends to slow down economic activity.
Lowering interest rates can promote growth.
The surge in inflation initially followed the global economy rebounding from the COVID-19 pandemic.
The ECB, the U.S. Federal Reserve, and other central banks rapidly increased interest rates in response.
The economic recovery strained supplies of parts and raw materials, a situation exacerbated by Russia’s invasion of Ukraine.
Russia’s invasion of Ukraine significantly disrupted the global energy market, as Moscow cut off natural gas supplies to Europe, causing energy prices to spike.
These pressures have since subsided, contributing to the current drop in inflation, allowing central banks to begin reducing rates.
However, economists predict that inflation could tick up slightly before the end of the year.
Some underlying measures of inflation, like the prices for services, remain elevated.
ECB President Christine Lagarde has stated that the bank will not commit to a specific timeline for future rate cuts.
The decline in energy prices played a significant role in September’s lower inflation figures, with energy costs dropping by 6 percent.
Inflation in the eurozone’s largest economy, Germany, matched the 1.8 percent overall rate, while in Italy, the third-largest economy in the bloc, inflation fell to just 0.8 percent.
Germany’s low inflation partly reflects its weakened economic growth.
The broader economic picture in the eurozone remains subdued, with the economy expanding by only 0.3 percent in the second quarter compared to the previous quarter.
Consumer spending is still low, overshadowed by the ongoing conflicts in the Middle East and Ukraine, as well as reports of layoffs and potential job cuts at major companies.
This article includes reporting from The Associated Press
