In a significant development for the European economy, inflation in the euro zone has dropped to its lowest level since October 2021. According to flash figures released, the annual inflation rate for September stood at 4.3%, a decline from the 5.2% recorded in August. On a month-on-month basis, the inflation rate decreased from 0.5% in August to 0.3% in September.
Core inflation, which is a key metric that excludes volatile components such as energy, food, alcohol, and tobacco, also witnessed a decline. It dropped to 4.5% year-on-year in September from the previous month's 5.3%. This metric is closely monitored by monetary policymakers as it provides a clearer picture of underlying inflationary pressures.
The European Central Bank (ECB) had recently taken measures to address the rising inflation by hiking interest rates to a record level in September, setting its key rate at 4%. This move was described by many as a "dovish hike." The ECB has also indicated that it believes the current rate levels might be sufficient to achieve its inflation target in the medium term.
The bank's projections for the euro area suggest that inflation will average around 5.6% this year, eventually falling to 3.2% in 2024 and further to 2.1% in 2025. Despite these projections, ECB officials have been cautious about future rate cuts. French central bank Governor Francois Villeroy de Galhau, in a conversation with CNBC, mentioned that it would be "premature" to speculate on the timing of the first rate cut.
However, the economic outlook remains complex. The ECB has forecasted a modest economic growth of 0.7% for the euro zone this year, with projections of 1% and 1.5% growth over the subsequent two years. Additionally, the recent surge in oil prices could pose a risk to the bank's inflationary forecasts.
Inflation rates vary significantly among European nations. Germany, the largest economy in the euro zone, recorded an annual inflation rate of 4.3%, even as it grapples with an economic contraction. Data from Eurostat, the EU's statistics agency, revealed that France's inflation rate harmonized across euro zone nations stood at 5.6% in September, while Spain recorded a rate of 3.2%. Countries like Slovakia and Slovenia are dealing with even higher inflation rates of 8.9% and 7.1%, respectively.
