French and Spanish inflation slowed to 3-year-old low

Inflation in two of the three strongest economies of the Eurozone hit a three-year low in September, under 2%, raising hopes that the European Central Bank (ECB) is going to continue cutting rates in October.

The EU-harmonised annual inflation rate in France fell to 1.5% in September, the lowest rate since July 2021 and down from 2.2%, according to the flash estimate from the French statistics office INSEE.

In a monthly comparison, prices declined by 1.2% which is the biggest drop since at least 1990.

The Spanish EU-harmonised annual inflation rate was also lower than expected in September, 1.7%, dropping from 2.4% in August, to its lowest level since March 2021, according to preliminary data from the Spanish statistics office INE.

Compared to the previous month, Spanish prices edged down by 0.1%.

The surprise decline in the annual inflation was mainly driven by falling energy prices in both countries. French food prices stood steady but the Spanish ones declined compared to September 2023.

Core inflation (price increase without counting food and energy prices) in both countries lowered to 2.4% in September.

Lower inflation expectations could fuel further ECB interest rate cuts

Lower inflation could give more room to the European Central Bank to further cut the benchmark interest rates, after two such moves this year. In September, the ECB lowered the deposit facility rate – the rate through which it steers the monetary policy stance – by 25 basis points to 3.50%, following a similar move in June.

The ECB is focused on the 2% inflation target, however, decisions are based on the core inflation rates, among others.

The better-than-expected data on Friday boosted market bets on another 0.25% cut on 17 October, based on pricing, investors give it a 70% chance, according to Bloomberg’s data.