Euro-Zone Inflation Slumps to 3-Year Low, Boosting Rate-Cut Case

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(Bloomberg) — Euro-area inflation plunged to the lowest level since mid-2021 – reinforcing arguments for another cut in interest rates by the European Central Bank in less than two weeks.

Consumer prices rose 2.2% from a year ago in August, Eurostat said Friday. That was significantly lower than July’s 2.6% and matched the median estimate of analysts in a Bloomberg survey.

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Core inflation, which excludes volatile components like food and energy, also eased to 2.8% after three months at 2.9%, as economists predicted.

The positive inflation news will help sustain the upbeat mood evident at the Federal Reserve’s annual Jackson Hole gathering last week, with Chair Jerome Powell joining ECB and the Bank of England officials in firmly signaling that rates are headed down.

Investors are betting on two or three more ECB cuts this year, plus additional steps in 2025. June’s landmark reduction began to unwind the unprecedented tightening campaign unleashed to tame the spike in prices that peaked at 10.6% in October 2022.

“September feels nailed on now for a rate cut,” NatWest Markets Head of Economics & Markets Strategy Imogen Bachra told Bloomberg Television earlier Friday. “I think the inflation data that we get this morning and over the next couple of months will set the scene for one more additional rate cut before the year is out.”

But while Portuguese central-bank chief Mario Centeno has called September’s decision to lower the deposit rate to 3.5% from 3.75% an “easy” one, recent days have brought warnings from influential officials that their battle with prices remains incomplete.

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Executive Board member Isabel Schnabel delivered the latest earlier in the day, saying in a speech that risks to the inflation outlook persist — particularly in the services sector — and that the ECB shouldn’t cut rates too rapidly.

“Given that the path back to price stability hinges on a set of critical assumptions, policy should proceed gradually and cautiously,” she said in Tallinn, Estonia. “The pace of policy easing cannot be mechanical. It needs to rest on data and analysis.”

Friday’s release from Eurostat revealed that services inflation, which is being pushed higher by steep increases in workers’ pay, quickened to 4.2%. The ECB sees price gains returning sustainably to its 2% goal at the end of 2025, but predicts ups and downs along the way. 

That prediction rests on wage growth moderating, corporate profits absorbing some of the increase in salaries and higher productivity lowering the cost per unit of output. While second-quarter productivity data disappointed, pay gains agreed through collective bargaining were lower than expected during that period.

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Separate data Friday, though, suggested further labor-market tightness as euro-zone unemployment unexpectedly dipped to 6.4%.

That may help lift an economy whose early-year momentum has been faltering of late — strengthening the arguments of some policymakers for an ECB rate cut on Sept. 12. Others, though, remain firmly focused on inflation.

“We need to be careful and must not lower policy rates too quickly,” Bundesbank President Joachim Nagel said late Thursday. “We are not there yet. While our 2 % target is in sight, we have not reached it.”

—With assistance from Joel Rinneby, Barbara Sladkowska, Guy Johnson, Kriti Gupta, Oliver Crook, Craig Stirling and Ott Tammik.

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