A first since 2021: Inflation falls below 2% in the euro zone

The rise in consumer prices in the 20 countries sharing the single currency fell to 1.8% year-on-year last month, its lowest level in three and a half years, thanks to falling energy prices, Eurostat figures revealed on Tuesday. For the first time since June 2021, inflation has fallen below the 2% target set by the European Central Bank (ECB).

This decline could encourage the monetary institution to lower its interest rates once again, from October, in order to revive flagging economic growth in Europe. The slowdown in inflation is even sharper than that expected by Factset analysts, who expected a figure of 1.9%, after 2.2% in August and 2.6% in July.

The President of the ECB, Christine Lagarde, expressed her confidence in this ebbing movement on Monday. “We will take this into account at our next monetary policy meeting” on October 17, she said during a hearing at the European Parliament, suggesting that a new cut in interest rates, the third this year , was possible as early as this month.

Core inflation – that is to say corrected for volatile energy and food prices – particularly scrutinized by the financial markets and the ECB, also continued its slow decline in September, at 2, 7% year-on-year, after 2.8% in August, according to the European statistics office Eurostat.

This good performance is mainly explained by a fall of 6% over one year in energy prices, including those of fuel at the pump, which had already fallen by 3% in August. The increase in service prices slowed slightly to 4% (-0.1 point compared to August). That of food (including alcohol and tobacco) rebounded very slightly to 2.4% (+0.1 point), while the increase in prices of industrial goods stabilized at a very low level (+0 .4% over one year, as in August).

“Inflation is falling below the ECB’s objective which envisages more rapid monetary easing,” commented Bert Colijn, analyst for the ING bank. According to him, “the ECB’s concerns now focus more on weak growth” in Europe.

Overall, the increase in consumer prices in the euro zone has been almost divided by six, since the record of 10.6% over one year reached in October 2022, when energy prices were soaring in the context of the war in Ukraine. This trend marks a victory for the ECB in its fight against soaring prices. It allowed it to start easing its monetary policy again in the spring.

To curb inflation, the monetary institution had increased borrowing costs at an unprecedented rate, from July 2022, however at the cost of a sharp slowdown in economic growth. On June 6, the ECB lowered its key rates for the first time in five years, offering a breath of fresh air to revive real estate credit and business loans. It made a further decline on September 12.

“The decline in inflation in September should be enough to persuade the ECB to further reduce its rates in October,” estimates Franziska Palmas, for Capital Economics.