IEurozone inflation has dropped to its lowest level in three years, reaching 2.2% in August, according to Eurostat’s flash figures released on Friday.
This decrease from 2.6% in July is consistent with economists’ forecasts and adds to expectations that the European Central Bank (ECB) will cut interest rates in September.
The core inflation rate, which excludes more volatile components such as energy, food, alcohol, and tobacco, also fell slightly, to 2.8% in August from 2.9% in July. This figure, like the headline inflation rate, was in line with Reuters’ poll of economists.
Following the release of this data, the euro fell slightly against the British pound, trading 0.1% lower at 0.8408 pounds. However, it rose 0.04% against the US dollar to $1.1083, as investors expected the Federal Reserve to cut interest rates in September, kicking off a new cycle of monetary easing.
The significant drop in inflation was fueled in part by Germany, the eurozone’s largest economy, where prices increased by only 2% on a harmonized basis in August, a sharper decline than expected.
Despite the overall decline in inflation, some economists, including those at ING, warn that core inflation may remain above 2.5% for the rest of the year due to ongoing price pressures in goods and services. Markets have already priced in another 25 basis point cut from the ECB in September, following a similar reduction in June, with the possibility of another cut before the end of the year.
Kyle Chapman, a foreign exchange markets analyst at Ballinger Group, noted that while the headline figure is positive, it primarily reflects lower energy prices and does not fully address underlying inflationary pressures. Chapman stated that ECB policymakers remain concerned about services inflation, which reached 4.2% in August. He pointed out that this figure, now at its highest level since October of the previous year, has been consistently around 4% for nearly a year and has been rising since the spring.
Ed Smith, co-chief investment officer at Rathbones Asset Management, echoed these concerns, particularly regarding wage inflation, which has been a focus of ECB President Christine Lagarde. Smith noted that while negotiated wages across the euro zone, which impact about 80% of the workforce, fell significantly in the second quarter, some price components, particularly in the service sector, remained stubbornly high. This, according to Smith, may keep some ECB policymakers cautious despite the overall trend of easing.
CNBC contributed to this report.
