Commentary Directory

A Breather for the Eurozone as Inflation Hits Two-Year Low

Jacob Hess
September 29, 2023

Euro area inflation showed signs of cooling off in September, registering at 0.3% month-over-month (MoM) and 4.3% year-over-year (YoY). This is a notable drop from the 5.2% YoY reported in August and marks the lowest annual inflation rate since October 2021. Core inflation, which excludes volatile items like food and energy, followed suit, coming in at 0.2% MoM and 4.5% YoY, also slower than the previous month's 5.3% YoY.

From Eurostat

The deceleration in price growth was evident across all segments. Food prices inched up by 0.1% MoM and 8.8% YoY (lower than previous annual rate of 9.7% YoY), while energy prices rebounded by 1.4% MoM but were still down by -4.7% YoY (also lower than previous YoY rate of -3.3% YoY). In terms of goods and services, annual inflation rates also cooled. Goods inflation was 2.2% MoM and 4.2% YoY, down from 4.7% YoY, and services inflation was -0.9% MoM and 4.7% YoY, down from 5.5% YoY.

The recent dip in annual inflation to an almost two-year low is undoubtedly good news for everyone, including the European Central Bank (ECB). This cooler rate of inflation significantly increases the likelihood that the ECB will hold steady in its next meeting, including concluding that the current policy rate has peaked. However, it is important to note the major drivers of the deceleration this month. Much of the cooling in the inflation rate can be attributed to base effects in the German CPI report. Additionally, rapid disinflation in two other large European countries—Belgium and the Netherlands—has likely had a significant impact on the euro area level numbers. Belgium's September inflation rates were -0.4% MoM and 0.7% YoY, while the Netherlands posted rates of -0.8% MoM and -0.3% YoY.

It's not time to let our guard down just yet. There are some upside risks to consider, particularly the recent rise in energy prices. This uptick could reverberate throughout various goods and services industries, leading to rising costs that could eventually be passed on to consumers. So while the latest inflation data offers some room for cautious optimism, it's essential to keep an eye on these other factors that could influence the inflation trajectory in the coming months.