A woman takes a selfie with the Eiffel Tower in the background on Rue de Surcouf in Paris on July 23, 2024, ahead of the 2024 Paris Olympics.
Mauro Pimentel | AFP | Getty Images
Euro zone inflation fell to a three-year low of 2.2% in August, statistics agency Eurostat showed on Friday, raising hopes of an interest rate cut by the European Central Bank in September.
The drop from 2.6 percent in July was in line with expectations of economists surveyed by Reuters.
The core index, which excludes volatile items such as energy, food, alcohol and tobacco, fell to 2.8 percent in August from 2.9 percent in July, in line with a Reuters poll.
The euro continued to weaken against the pound after the announcement, trading 0.1% lower at 0.8408 pounds. The euro rose 0.04% against the US dollar to $1.1083 as investors braced for the Federal Reserve’s September interest rate cut, the first step in monetary easing in the current cycle.
In Germany, the euro zone’s largest economy, inflation on a single euro zone basis slowed more than expected, to 2 percent this month.
Economists at ING expect core inflation in the euro zone to remain above 2.5 percent this year thanks to strong performance in goods and services.
Markets are fully pricing in an initial rate cut from the ECB in June, followed by a further 25 basis points in September and a further 25 basis points by the end of the year.
Nonetheless, the announcement contains details that may unnerve ECB policymakers, particularly the 4.2% rate of services inflation, said Kyle Chapman, a foreign exchange market analyst at Ballinger Group.
“The upbeat headline was driven purely by energy prices and masks the fact that there has been little substantive improvement in underlying pressures,” Chapman said in a note.
“Services inflation is at its highest level since October last year and has been hovering around 4% for almost a year, heading in the wrong direction since the spring.”
Speaking on CNBC’s “Squawk Box Europe” on Friday ahead of the latest data release, Ed Smith, co-chief investment officer at Rathbone’s Asset Management, said the central bank is on track for further rate cuts, noting that European Central Bank President Christine Lagarde’s focus on wage inflation.
“Wage negotiations are a big issue in the eurozone. [they] Accounting for approximately 80% of the workforce [who] “Wage increases are being negotiated. Negotiated wages across the euro area fell sharply in the second quarter, and other indicators such as Indeed.com job vacancies also fell. The ECB’s business telephone survey also points to a decline in willingness to raise wages.”
“However, the latest [Purchasing Managers’ Index] “Regardless of the numbers, surveys of the services sector suggest some rigidity in the price structure,” he added, suggesting some ECB voting members would remain cautious.
