Eurozone inflation fell this month to its lowest level since June 2021, strengthening the case for the European Central Bank to cut interest rates in September.
Inflation in the single currency area fell to 2.2% in August from 2.6% in July, just above the ECB’s 2% target.
The ECB, led by Christine Lagarde, is considering whether to cut interest rates at its next meeting on Sept. 12. It cut its key rate from 4% to 3.75% in June, which would be the first cut since 2019.
Central banks around the world are plotting a “soft landing” to keep inflation below their targets while avoiding a recession. Federal Reserve Chairman Jerome Powell said last week that “the time has come” to cut interest rates in the United States, but Bank of England Governor Andrew Bailey has warned against cutting rates too quickly.
The expected series of rate cuts comes as a wave of price hikes subsides amid chaos caused by the coronavirus pandemic, when pandemic lockdowns disrupted supply chains and caused prices to soar, before Russia’s all-out invasion of Ukraine sent global energy prices soaring.
Falling energy inflation was the biggest factor dragging down Europe’s harmonized consumer price index in August, according to European Union data agency Eurostat.
Core inflation, which excludes volatile factors such as energy prices, fell slightly to 2.8% from 2.9%, but services inflation rose to 4.2% from 4% due to higher service prices in France due to the Paris Olympics.
Bert Collin, senior euro zone economist at Dutch investment bank ING, said core inflation was unlikely to fall below 2.5 percent this year.
“The ECB has come a long way in terms of getting inflation back to its target level,” Collin said, adding that the gradual decline in inflation pressures and the prospect of slowing inflation next year should be enough for the ECB to cut rates in September.
But he also said: “The ECB remains concerned about upside risks to the inflation outlook and this remains a slow and gradual process of releasing the brakes on the economy.”
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The euro zone’s unemployment rate also unexpectedly fell to 6.4% from 6.5%. Central banks tend to be cautious about cutting interest rates when unemployment is falling, as it can be a sign of labor shortages and lead to increased inflationary pressures.
Trading on financial markets on Friday suggested a 0.25 percentage point cut in the ECB’s key interest rate is all but certain, with two further cuts expected before the end of the year.
Sam Miley, head of forecasts at the Centre for Business and Economic Research, warned that “higher core inflation and continued tight labour markets pose risks to the implementation of accommodative monetary policy.”
