Eurozone inflation falls below 2% target

In September, the eurozone witnessed its annual inflation rate drop to the lowest level seen in three and a half years, according to official statistics released on Tuesday. This decline brought inflation below the European Central Bank’s (ECB) target of two percent, raising speculation about a potential interest rate reduction.

Consumer prices in the eurozone rose by just 1.8 percent year-on-year in September, down from 2.2 percent in August, largely due to a decrease in energy costs. This figure marks the lowest inflation rate since April 2021 and surpassed analysts’ expectations of 1.9 percent, as reported by financial data firm FactSet.

However, core inflation, which excludes volatile categories such as energy, food, alcohol, and tobacco, slightly decreased to 2.7 percent in September from 2.8 percent in August, according to the EU’s official statistics agency.

Christine Lagarde, the ECB’s president, indicated on Monday that this latest inflation data would influence discussions at the upcoming monetary policy meeting in October. The ECB has already lowered borrowing costs twice in recent months, and the new data may bolster hopes for an additional cut during the next meeting scheduled for October 17.

This shift in outlook contrasts sharply with earlier predictions from economists, many of whom anticipated that any rate cut would not occur until December. “The recent figures should be enough to convince the ECB to consider a rate cut in October, despite persistent high services inflation,” noted Franziska Palmas, a senior economist at Capital Economics.

The inflation decline coincides with a significant 6.0 percent drop in energy prices in September, compared to a 3.0 percent decrease in August, according to Eurostat data.

Lagarde warned, however, that the path ahead might not be entirely smooth, suggesting that inflation could see a temporary uptick in the fourth quarter as previous significant drops in energy prices are factored into annual comparisons. Nonetheless, she expressed confidence that the latest trends would support a timely return to the ECB’s inflation target.

The ECB’s recent forecasts project that inflation in the eurozone could stabilize at the targeted two percent by the end of 2025. Services inflation, which had been rising, eased slightly to 4.0 percent in September, down from 4.1 percent in the previous month. Conversely, food and beverage prices saw a minor increase, rising to 2.4 percent in September from 2.3 percent in August.

In September, inflation rates fell below two percent in Germany and France, the eurozone’s two largest economies, registering 1.8 percent and 1.5 percent, respectively. Ireland recorded the lowest inflation rate in the eurozone for September at just 0.2 percent, according to the data.