An EU flag flies in front of the European Central Bank (ECB) headquarters in Frankfurt, Germany, on July 18, 2024. Jana Rodenbusch/Reuters
Eurozone inflation fell to its lowest level in more than three years this month due to falling energy costs, official data showed on Friday (August 30), raising hopes of an interest rate cut from the European Central Bank.
Consumer price inflation slowed to 2.2% year-on-year in August after hitting 2.6% in July, closer to the European Central Bank’s 2% target. The August increase was the weakest since July 2021 and in line with expectations from analysts polled by FactSet and Bloomberg.
But core inflation, which excludes volatile energy, food, alcohol and tobacco prices, eased slightly to 2.8 percent in August from 2.9 percent in July, according to Eurostat. Friday’s data will provide some relief after July’s inflation rate unexpectedly rose.
The ECB launched an aggressive interest rate-hiking campaign in July 2022 to rein in soaring inflation, which peaked at 10.6% in October 2022 after Russia’s invasion of Ukraine sent food and energy prices soaring.The ECB cut interest rates in June this year for the first time in nearly five years.The Frankfurt-based institution has kept rates on hold since then, but markets expect further cuts after the Sept. 12 meeting.
The data “increases the likelihood of a rate cut at the ECB’s September policy meeting,” said Sam Myrie, a researcher at the London-based Centre for Economics and Business Research. “However, rising core inflation and continued tightness in the labour market pose risks to the implementation of an accommodative monetary policy,” Myrie said.
François Villeroy de Galhau, governor of the Bank of France, said in an interview with French magazine Le Point that the September rate cut was “fair and sensible.” “If we waited to cut rates until they were actually at 2 percent, it would be too late,” he said in comments published on Friday. Villeroy de Galhau is a member of the ECB’s governing council, which decides interest rates.
The Olympic Effect
ECB governing council member Isabel Schnabel warned on Friday, before the data was released, that a cautious approach was needed to easing monetary policy. “The pace of policy easing cannot be mechanical. It needs to be based on data and analysis,” she said in a speech in the Estonian capital, Tallinn.
August’s strong performance was mainly due to energy prices, including gasoline prices, falling 3.0% in August. The fall came after energy costs rose 1.2% in July. Eurozone food and beverage prices rose 2.4% this month, slightly up from 2.3% in July. Services inflation accelerated to 4.2% in August, up slightly from 4.0% in July, likely due in part to the Paris Olympics.
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“Services inflation may not be as bad as it first seems,” said Jack Allen Reynolds of Capital Economics. He said the rise in inflation could be due in part to a spike in hotel and travel costs caused by the Olympics. Allen Reynolds added that he expects a rate cut in September and again in December “if services inflation falls as expected later this year.”
Inflation slows in France, Germany
There was also a welcome slowdown in inflation in Europe’s two biggest economies: Germany’s inflation rate was 2.0% year-on-year in August, down from 2.6% in July, according to Eurostat, while French consumer prices rose to 2.2% this month, down from 2.7% in July.
Lithuania recorded the euro zone’s lowest inflation rate of 0.7 percent in August, according to Eurostat data. Other Eurostat data released on Friday showed the single currency area’s unemployment rate fell slightly to 6.4 percent in July from 6.5 percent in June.
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