Eurozone inflation has fallen to its lowest level in more than three years, driven by a significant drop in energy costs, according to official data released on Friday.
Consumer prices in the eurozone rose by 2.2 percent in August compared to the same month last year, down from 2.6 percent in July. This marks the lowest inflation rate since July 2021, bringing it closer to the ECB’s target of 2 percent.
Core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, also saw a slight decrease, dropping to 2.8 percent in August from 2.9 percent in July, according to Eurostat.
The latest inflation figures provide some relief after a surprise increase in July. The ECB has been on an aggressive rate-hiking campaign since July 2022 to combat high inflation, which peaked at 10.6 percent in October last year following the economic impact of Russia’s invasion of Ukraine. The conflict led to a sharp rise in food and energy prices across Europe.
The ECB cut interest rates for the first time in June 2023 and has since maintained them at their current level. However, the market anticipates another rate cut following the ECB’s upcoming policy meeting on September 12.
Sam Miley, an economist at the London-based Centre for Economics and Business Research, noted that the August inflation data “makes a rate cut at the European Central Bank’s upcoming September policy meeting more likely.”
Nonetheless, Miley cautioned that the persistently high core inflation and a tight labor market could pose challenges to loosening monetary policy.
French central bank governor Francois Villeroy de Galhau, who sits on the ECB’s governing council, has publicly advocated for a rate cut in September. In an interview with the French magazine Le Point, Villeroy de Galhau argued that delaying a rate cut until inflation hits the 2 percent target would be “too late.”
However, not all ECB officials are in agreement. ECB board member Isabel Schnabel, speaking before the data release, urged caution, stating that any easing of monetary policy “cannot be mechanical” and must be guided by careful analysis of economic data.
The decline in inflation in August was primarily due to a 3.0 percent drop in energy prices, reversing a 1.2 percent increase observed in July. Meanwhile, food and drinks prices rose slightly by 2.4 percent, up from 2.3 percent in July.
Services inflation also edged up to 4.2 percent from 4.0 percent in the previous month, potentially influenced by the Olympic Games in Paris, which drove up prices for accommodation and transportation.
