2024-09-02 05:56:30
The time for interest rate cuts in the Eurozone and the US is drawing near, after Friday’s data showed a deceleration in inflation.
In the Eurozone, inflation eased in August to 2.2% from 2.6% in July, making a second rate cut by the ECB at next month’s meeting almost certain. This is the lowest inflation rate since July 2021, before inflation starts to pick up to peak at 10.6% in October 2022. The fall in annual inflation in August was mainly due to a large 3% drop in energy prices . In the US, the Fed’s focus of inflation showed a marginal increase in July, which is not expected to affect the Federal Reserve’s plans to cut interest rates in September.
In detail:
In the eurozone, inflation decreased in August to 2.2%, from 2.6% in July.
This is the lowest inflation rate since July 2021, before inflation began to pick up, peaking at 10.6% in October 2022. The fall in annual inflation in August was mainly due to the large decline of 3 % of energy prices. This positive development is considered to finalize the reduction of interest rates by the ECB at the meeting of the board of directors of the Central Bank, on September 12. It is recalled that the ECB was the first central bank to cut interest rates, in June, from 4% to 3.75%.
Even the perceived par excellence “hawk” A member of the ECB’s executive board, Isabelle Schnabel, came out in favor of cutting interest rates, saying that a further gradual reduction would not derail the process of deflation, as some members fear. “Since a return to price stability depends on a set of critical assumptions, policy should proceed gradually and cautiously,” she said in a speech in Tallinn, Estonia. “The pace of policy relaxation cannot be mechanical. It must be based on data and analysis,” he added. “We can be more and more confident that, in September, it is possible to lower interest rates,” the head of the central bank of Estonia, Mandis Mueller, also said, speaking to Bloomberg in Tallinn.
The markets they are betting on two or three more declines by the ECB this year, plus further steps in 2025. However, prices in the services sector rose to 4.2%, from an already high rate of 4%. Their increase is considered, however, to be the result of the Paris Olympic Games and the strengthening of the purchasing power of workers, after the recent wage increases. Core inflation, which excludes volatile food and energy prices, also eased to 2.8% from 2.9% in July.
Among member states, falling inflation in Germany contributed most to the largest decline in the Eurozone. Germany’s harmonized consumer price index fell to 2% in August, down significantly from the 2.3% expected.
Deflation
On a monthly basis, Germany recorded deflation with prices falling by 0.2%, due to a sharp drop in energy prices. Other member states that recorded, in August, negative inflation were Lithuania (0.5%), Finland (0.5%), Latvia (0.4%), Italy (0.1%), the Austria (0.1%) and Portugal (0.1%).
Belgium was one of the member states that showed a 1.6% increase in inflation compared to a 0.6% decrease in July, recording the biggest monthly increase since February 2024. Year-on-year, Belgium recorded the highest inflation at 4.5%, although this figure is lower than July’s 5.4%, followed by Estonia with 3.4%, the Netherlands with 3.3%, Slovakia with 3.2% and Greece with 3.1%. The lowest levels of annual inflation were Latvia (0.9%) and Finland, Ireland and Slovenia (all three 1.1%). Eurostat also announced employment data, with unemployment in the Eurozone falling from 6.5% to 6.4% in August.
Marginal increase in July in the US
In the US, the most preferred gauge of inflation the Fed focuses on showed a marginal increase in July, which is not expected to affect the Federal Reserve’s plans to cut interest rates in September.
The structural index
The so-called structural index of individual consumer spending, which excludes volatile food and energy prices, rose 0.2% in July from June. On an annual basis, it increased by 1.7%, which is the lowest rate of the year. Fed officials focus more on the structural index, as more representative of longer-term trends.
The moves of the Fed
Friday’s data reinforces the estimate that the Fed will begin to de-escalate interest rates from next month, as its president, Jerome Powell, had previously announced from Jackson Hole. Powell had stated in the clearest way, last Friday, that the “time has come” to start reducing interest rates, reinforcing estimates that the Fed at its meeting on September 17-18 will begin monetary easing of the policy with a reduction in interest rates of the order of 0.25