Eurozone annual inflation fell to 2.2% in August 2024, but core inflation, driven by persistent service costs, remains subdued. ECB President Schnabel has urged caution about a possible rate cut.
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Eurozone inflation has fallen to its lowest level in more than three years, fuelling speculation that the European Central Bank may soon consider cutting interest rates.
The harmonized index of consumer prices across the currency area recorded a year-on-year increase of 2.2% in August 2024, according to provisional data from Eurostat. That was the lowest annual rate of inflation since July 2021, before surging to a peak of 10.6% in October 2022.
That marked a sharp easing from July’s 2.6% increase and was in line with economists’ expectations.On a monthly basis, the overall index rose 0.2% after stagnating in July.
The decline in annual inflation was mainly due to a sharp 3% decline in energy prices and favourable base effects.
Core inflation, which excludes highly volatile items such as energy and food, edged down to 2.8% from 2.9% year-on-year, the lowest level since April 2024. But on a monthly basis, core inflation rose 0.3%, mainly due to higher services prices.
Services-related expenses, which account for about 45% of the euro zone’s harmonized index, rose 4.2% year-on-year in August, up from 4% the previous month and up 0.4% month-on-month.
“Current headline inflation rates underestimate the challenges monetary policy still faces, so policy should proceed gradually and cautiously,” European Central Bank Governing Council member Isabel Schnabel said in a speech in Estonia on Friday. She stressed that domestic inflation remains high at 4.4 percent, mainly due to persistent price pressures in the services sector, where deflation has effectively stagnated since November last year.
In a separate release, Eurostat reported that the euro zone’s unemployment rate fell to 6.4% from 6.5% in August, below market expectations of 6.5%.
Inflation in Germany shrinks, Belgium soars
Among eurozone member states, Germany played a major role in keeping inflation down across the region in August.
Germany’s consumer price index fell 2% year-on-year in August, well below the 2.3% forecast.
Germany recorded deflation on a monthly basis, with price pressures shrinking by 0.2% due to a sharp fall in energy prices.
Other member states which posted negative monthly inflation rates in August include Lithuania (-0.5%), Finland (-0.5%), Latvia (-0.4%), Italy (-0.1%), Austria (-0.1%) and Portugal (-0.1%).
In contrast, inflationary pressures increased noticeably in Belgium during the month, with the harmonized inflation rate rising by 1.6% compared to July 2024. This sharp increase marked a major turning point.
That was up from a 0.6% decline in July and the biggest monthly increase since February 2024. On an annual basis, Belgium had the highest inflation rate at 4.5%, down from 5.4% in July, followed by Estonia at 3.4% and the Netherlands at 3.3%.
Market reaction
The euro held firm against the dollar after the inflation data was released, likely due to persistent inflation in the services sector. By 11:15 a.m. CET, the euro was trading at $1.1080, holding steady after two consecutive days of declines.
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Yields on 10-year government bonds were little changed in Germany after Thursday’s decline, but fell slightly by 3 basis points in France, Italy and Spain.
European stocks continued their upward trend on Friday, with the Euro Stoxx 50 rising 0.6%, its fourth consecutive weekly gain. Top performers on the Euro Stoxx 50 included Adidas, LVMH and Amadeus IT, which rose 1.6%, 1.4% and 1.1%, respectively.
Among national stock indexes, France’s CAC 40 rose 0.6%, Italy’s FTSE MIB rose 0.5% and Germany’s DAX rose 0.1%, with the German DAX hitting a new record high of more than 18,950 points in morning trading.
