Eurozone inflation drops in September, falling below ECB’s target

The year-on-year eurozone inflation rate for September was released on Tuesday, coming in at 1.8%, according to Eurostat.

This was a step down from August’s 2.2%, while also being lower than analyst expectations of 1.9%. It was also the lowest figure since April 2021, successfully bringing inflation down to below the European Central Bank’s 2% target. 

The decrease in inflation was mainly because of dropping energy prices, which fell to -6% in September, down from -3% in August. Services inflation also inched down to 4% in September from 4.1% in the previous month. 

However, food, tobacco and alcohol inflation edged up slightly, at 2.4% in September, up from 2.3% in August. 

The year-on-year core inflation rate came in at 2.7% in September, down from 2.8% in the previous month. 

French inflation in September plunged to 1.5% from 2.2% in August, whereas Spanish inflation came down to 1.7%, from 2.4% in August. 

Italian inflation also eased to 0.8% in September, from 1.2% in the previous month, with German inflation also doing the same, at 1.8% in September, down from 2% in August. 

Eurozone economy may not be out of the woods yet

Although September’s inflation rates are promising, the eurozone economy may not completely be in the clear yet. The European Central Bank has recently revealed that it still expects inflation to increase again in the last few months of the year, mainly because of energy prices stabilising. 

The ECB slashed interest rates to 3.50% in September and has also hinted that another cut could be coming in the near future. 

Kyle Chapman, FX analyst at Ballinger Group, said in an email note: “After a series of sub-2% inflation prints from the bloc’s largest economies in recent days, eurozone-wide CPI dipped to 1.8% in September. On a month-on-month basis, prices fell –0.1%. Services inflation remains high at 4.0%, but it also contracted on the month.

“The ECB’s doves have a very strong case now to go to the Governing Council meeting in a few weeks’ time and say: ‘Let’s get moving’. When officials meet, they are going to have to face up to advanced disinflation, a crumbling economic recovery, and consumer confidence in a trough.

“Policy is far too restrictive given the tough macro environment, and a switch to consecutive rate cuts seems to be a given now that disinflation is in its late stages.

“The remaining hawks will point to stickiness in the yearly services inflation print to justify a pause, but prices actually fell on a monthly basis, and the leading signals are clear that momentum is cooling, particularly for backward-looking wage negotiations that are now going to be conditioned on 2% inflation.”

Regarding the ECB’s recent September rate cut, Ilya Volkov, chief executive officer (CEO) and co-founder of crypto financial institution YouHodler, said in an email note: “The European economy continues to face significant challenges.

“In France, a rising tax burden has further weakened the investment climate, with the budget deficit expected to surpass 5.5% in 2024, while national debt hovers at 112% of GDP. 

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“Germany’s labor market is also feeling the strain, with unemployment over 6% and expected to climb, alongside a GDP contraction and a declining IFO Business Index—clear indicators of recession.

“The ECB’s rate cuts appear to be a desperate measure to control the situation, but in our view, they won’t be enough to address the deeper economic issues now at play in the European Union.

“China’s recent economic stimulus will likely offer only temporary relief. Despite a surge in European luxury stocks following the announcement, this boost won’t translate into long-term growth unless consumer confidence rebounds.

“Without sustained structural change, the EU is headed for another downturn once these temporary measures fade.”

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