Inflation in the euro zone has dropped to its lowest level in two years, providing some relief for policymakers at the European Central Bank (ECB). The latest data from Eurostat’s flash reading shows that consumer prices in the 20 countries sharing the euro rose by 4.3% in September, down from 5.2% in August. This is the slowest pace since October 2021.
A key measure for the ECB, which excludes food, energy, alcohol, and tobacco, also saw a decline in inflation, falling to 4.5% from 5.3%. This represents the largest drop since August 2020. These figures strengthen the ECB’s belief that its steady diet of interest rate hikes has been successful in curbing runaway inflation. The target is to bring inflation down to 2% by 2025.
Diego Iscaro, the head of European economics at S&P Global Market Intelligence, noted that the drop in inflation can be attributed to both base effects and a decrease in underlying inflationary pressures. Iscaro also suggested that interest rates may have reached their peak in the current tightening cycle.
The decline in inflation was broad-based, with all price categories experiencing slower growth. Additionally, energy prices fell for the fifth consecutive month.
However, concerns have been raised about the impact of the ECB’s rate hikes on the economy. The steepest tightening cycle in the ECB’s history has started to show signs of affecting the euro zone, with some indicators pointing to a possible recession. German retail sales fell in August, and unemployment rose in September, potentially indicating that the euro zone’s largest economy could be heading for its second recession this year.
The ECB remains optimistic about an economic rebound next year, particularly as inflation falls and real wages rise. However, this outlook is contingent on the external environment remaining stable and investment levels remaining resilient. The recent slowdown in China’s economy has also raised concerns.
Overall, the drop in inflation provides some relief for the euro zone, indicating that the ECB’s efforts to control prices are having an effect. However, the impact on economic growth and the potential risk of a recession are important factors that policymakers will need to monitor closely in the coming months.