Eurozone inflation has reached its lowest level in almost two years, providing hope that the significant increase in consumer prices may be subsiding. This development could lead to the European Central Bank (ECB) pausing its interest rate hikes. The release of better-than-expected figures for eurozone and French inflation caused European government bonds to rally and equity markets to strengthen. In September, consumer prices in the Eurozone rose by 4.3%, down from 5.2% in August, according to Eurostat. Core inflation, which excludes energy and food, also fell more than anticipated to 4.5% from 5.3% in August. Economists suggest that there are clear signs of underlying price pressures cooling.
The sharp decline in inflation has increased investors’ expectations that the ECB will end its recent streak of 10 consecutive interest rate increases during its upcoming governing council meeting on October 26. The central bank has raised its benchmark deposit rate from a historic low of -0.5% to a record high of 4%, aiming to limit activity and temper price pressures. However, analysts believe that rate cuts will not be implemented until late 2024 despite the belief that the ECB has completed its interest rate hikes. Eurozone inflation has declined from its peak of 10.6% last year, at a rate slower than the US but faster than the UK.
Following Thursday’s turmoil in European bond markets, Italian and German government bond yields experienced a decline on Friday. Italian 10-year bond yields dropped 0.17 percentage points to 4.75%, while German 10-year bond yields fell 0.14 percentage points to 2.83%. The euro also strengthened against the dollar, and equity markets in Europe experienced gains. The Stoxx 600, Germany’s DAX, and France’s CAC 40 index all saw positive movements in response to the inflation data.
Price growth slowed in 15 out of 20 eurozone countries, with inflation below the ECB’s 2% target in two of them. The removal of last year’s inexpensive German public transportation tickets and fuel prices from the annual comparison contributed to the decline in inflation. Additionally, France’s recent reduction in electricity subsidies led to higher energy prices. Furthermore, the eurozone economy is expected to contract in the third quarter, as reflected by the decline in German retail sales and French household spending in August. Despite the recent increase in oil prices, energy costs in the Eurozone fell by 4.7% year-on-year in September. Inflation rates for food, alcohol, and tobacco decreased to 8.8%, while goods inflation dropped to 4.2%. Services inflation was affected by a significant monthly decline in airfares, resulting in an overall slowdown to 4.7%.