In September, eurozone inflation fell below 2% for the first time since mid-2021, coming in at 1.8%, down from 2.2% in August. This decline, primarily driven by falling energy prices and modest goods price growth, exceeded expectations and reinforces the case for another European Central Bank (ECB) interest rate cut. Core inflation, which excludes energy and other volatile components, also dipped slightly to 2.7%, signaling a continued easing of price pressures.
Over the past three years, inflation in the 20 euro-sharing countries surged due to high energy costs, supply chain disruptions following the pandemic, and strong fiscal support measures, peaking at over 10% in late 2022. The ECB responded with a series of aggressive interest rate hikes, which have successfully curbed inflation more quickly than anticipated. Now, policymakers are debating the pace of rate reductions to support economic growth, with the ECB already cutting rates in June and September.
ECB President Christine Lagarde recently hinted that another rate cut could be on the horizon, citing improving inflation trends and weak growth data. Markets have responded by increasing bets on further rate cuts, with the likelihood of a reduction at the upcoming October 17 meeting now at 85%, compared to 25% a week ago. Investors are also pricing in the possibility of additional cuts in December and possibly January, given moderating wage pressures and a slowdown in services inflation, which fell to 4.0%.
While the ECB had previously forecast that inflation would remain above its 2% target until the end of 2025, Lagarde's comments suggest that inflation is now below the bank's baseline projections. Falling energy costs, which remain the primary driver of disinflation, coupled with lower non-energy industrial goods prices, point to further downside risks for inflation. Some economists and investors now believe that inflation could fall below the ECB’s 2% target sooner than expected, prompting a reevaluation of the bank’s future monetary policy moves.
