The eurozone inflation rate fell to 2,9% in October, the lowest level for over two years. This has boosted expectations that European Central Bank won’t raise interest rates any further.
This is the lowest annual increase in consumer prices in the region since July 2021.
According to Eurostat the EU’s statistics arm, it was due to a decline in energy prices and food inflation.
The October rate of 2,9% also fell short of the economists’ expectation of 3,1% amid signs that world’s major central banks are now satisfied that they’ve done enough to reduce inflation to their 2-percent target.
Carsten Brzeski is the global head of macro-research at Dutch bank ING. He said: “This is the moment when the three main central banks realize that the first part is done with the inflation. They are now in this situation where they will keep rates higher for longer. But no one knows exactly how long.”
Last week, the ECB maintained its benchmark deposit rate at 4 percent. This marked an end to its 10-week-long increase.
At its meeting on Tuesday, the US Federal Reserve will likely keep interest rates unchanged for a second time in a row. Bank of England will likely do the same thing a day after. The figures released on Tuesday revealed that UK Shop inflation had eased to the lowest rate for more than a decade due to falling food costs.
The economists believe that the inflation rate will slow down as the Israel-Hamas conflict drives up energy prices and the base effect from comparing the energy prices to last year’s levels decreases.
Jack Allen Reynolds, an economist with Capital Economics, said that “inflation is unlikely to continue falling at this rapid pace in the future”. He said that “energy prices will likely rise a bit in the coming months”. The range of inflation within the Eurozone is still wide, ranging from 7.8% in Slovakia to less than 1.7% in Belgium in the year up to October.
The sharp drop in prices was a reflection of the weaker economic activity in the entire region, according to Eurostat. In the three-month period ending September, the economy shrank by 0.1 percent. This was lower than economists had predicted and followed a contraction in Germany, Ireland, and Austria that offset growth in Spain & France.
In the last year, the eurozone’s economy barely grew as consumers and business owners faced higher borrowing costs, a weaker global market and the largest surge in cost of living in a generation.
The figures released Monday confirmed Germany’s position as one of the weakest major economies in the world after its Gross Domestic Product (GDP) declined by 0.1 percent.
The US economy, on the other hand, has experienced rapid growth, with an annualised third quarter growth of 4.9 percent reported last week.
Rory Fennessy is an economist with Oxford Economics. He said that the eurozone’s economy was set to stagnate, and growth would only return once real incomes grew sufficiently. “Momentum heading into the fourth quarter is exceptionally weak and weighed down by tightening financial conditions.”
The figures released on Tuesday showed that the core inflation rate in the eurozone, excluding energy and food, was in line with predictions, falling to 4.2% from 4.5 percent in September. The ECB closely monitors this metric as a measure of underlying inflation pressures.
Last week, ECB President Christine Lagarde said that wage growth is also “critically significant” in determining inflation expectations.
She said that the details of the next round collective wage bargaining agreement with unions will only be available “way into 2024”, indicating the bank would have to wait until then to decide if it would start reducing borrowing costs.
Mark Wall, Chief European Economist at German lender Deutsche Bank said: “The ECB must see wage inflation slowing. This could take another six months.”