Annual inflation in the euro zone fell to its lowest level since October 2021, dropping to 4.3% in September, according to flash figures released on Friday. This is a decline from the 5.2% annual reading in August, with month-on-month inflation decreasing from 0.5% to 0.3%. Core inflation, which excludes energy, food, alcohol, and tobacco, also saw a decline, dropping to 4.5% year-on-year in September from 5.3% in August.
The decrease in inflation comes after the European Central Bank (ECB) decided to hike interest rates to a record level in September, setting its key rate at 4%. This move was seen as a “dovish hike” as the ECB indicated that it believes rates may be high enough to bring inflation to its target level in the medium term. The bank’s latest projections predict that inflation will average 5.6% this year, then fall to 3.2% in 2024 and 2.1% in 2025.
However, officials have cautioned against expecting rate cuts in the near future. French central bank Governor Francois Villeroy de Galhau stated that it would be “premature” to speculate on when the first rate cut might occur. The economic outlook for the euro zone remains uncertain, with the ECB forecasting modest growth of 0.7% this year, followed by 1% and 1.5% over the next two years.
Another potential risk to inflationary forecasts is the recent surge in oil prices. The ECB’s projections may need to be revised if oil prices continue to rise.
Additionally, the inflationary picture varies significantly among European nations. Germany, the euro zone’s largest economy, continues to experience price increases well above the target rate, with annual price rises at 4.3%. However, Germany is also facing an economic contraction. In contrast, France recorded headline inflation of 5.6% in September, while Spain saw 3.2% inflation. Slovakia and Slovenia are grappling with inflation rates of 8.9% and 7.1%, respectively, according to estimates from Eurostat, the EU’s statistics agency.
Overall, the cooling inflation in the euro zone provides some relief, but uncertainties remain regarding the future path of inflation and the potential impact on monetary policy.