Eurozone inflation dips below the 2% target in September, heightening expectations for another rate cut this month

Eurozone inflation fell to 1.8% in September, down from 2.2% in August, beating expectations of a 1.9% rise. The drop was mainly driven by lower energy costs and stable goods prices. This marks the first time in three years that inflation has fallen below the European Central Bank’s (ECB) 2% target, suggesting the ECB’s efforts to combat inflation may be nearing completion. It has also fueled expectations of another rate cut this month.

The same report showed core inflation, which excludes volatile components like energy and food, increased by 2.7% in September, slightly lower than the 2.8% rise in August and forecast. The slowdown in services price growth was the main factor contributing to the lower-than-expected core inflation figure.

Inflation in the Eurozone had remained above the ECB’s target for years, driven by surging energy prices due to the Ukraine war, supply chain issues during the Covid crisis, and significant fiscal stimulus. These factors pushed inflation to over 10% by late 2022, prompting the ECB to sharply raise interest rates to bring inflation under control.

Now, EU policymakers are facing a decision on the pace of monetary easing, with the ECB having already reduced rates in June and September. ECB President Christine Lagarde has signaled that another rate cut may come later this month. While the quick response was initially unexpected, weaker growth data, easing wage pressures, and inflation falling below the ECB’s forecasts have increased the urgency for further action.