Thanks to falling energy prices, inflation in the euro area has fallen below two percent for the first time since May 2021. This allows the ECB to further ease interest rates.
For the first time in more than three years, the inflation rate in the euro area is below two percent. Goods and services only increased in price by an average of 1.8 percent compared to the same month last year, as the statistical office Eurostat announced in an initial estimate. In August, inflation was 2.2 percent and in July it was 2.6 percent.
Falling energy prices in particular contributed to the further decline in inflation. Prices for energy products were six percent below the level of September last year. However, food, alcohol and tobacco prices rose by 2.4 percent. The price increase was once again highest for services at 4.0 percent.
For Germany, Eurostat reported an inflation rate of 1.8 percent. For international comparability, the EU authority uses a different calculation method than the Federal Statistical Office, which estimated inflation in Germany for September at 1.6 percent on Monday.
Interest rate cut on October 17th more likely
“It was clear that inflation would fall well below the two percent mark because of the fall in energy prices,” said Commerzbank chief economist Jörg Krämer. “It is noteworthy, however, that inflation has fallen even without the volatile prices for energy and food.”
This means that there are increasing signals that the European Central Bank (ECB) is likely to further loosen its monetary policy and lower the key interest rate again in October. For the first time since May 2021, inflation is now below the target of two percent, which the ECB sees as ideal for the economy in the euro area in the medium term. In September, the ECB lowered the key interest rate to 3.5 percent for the first time since its monetary policy change in June.
According to its President Christine Lagarde, the central bank is optimistic about the decline in inflation. “The latest developments strengthen our confidence that inflation will return to the target level in a timely manner,” Lagarde said on Monday at a hearing in the European Parliament in Brussels. “We will take this into account at our next monetary policy meeting in October.”