Eurozone inflation falls more than expected to 2.9%

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Eurozone inflation fell to 2.9 per cent in October, its lowest for more than two years, bolstering expectations that the European Central Bank will not raise interest rates further.

The figure compared with 4.3 per cent in September and represented the region’s slowest annual growth in consumer prices since July 2021.

It came after the bloc’s economy started to shrink in the third quarter and was mainly a result of falling energy prices and a drop in food inflation, according to Eurostat, the EU statistics arm.

October’s 2.9 per cent rate also undershot economists’ expectations of 3.1 per cent amid signs that the world’s big central banks now consider that they have done enough to bring inflation down to their 2 per cent targets.

“This is clearly the moment that the three major central banks realise the first part of the job is done on inflation and they are now moving into this situation of keeping rates higher for longer, though no one quite knows how long,” said Carsten Brzeski, global head of macro research at Dutch bank ING.

The ECB held its benchmark deposit rate steady at 4 per cent last week, ending its unprecedented series of 10 consecutive increases.

The US Federal Reserve is expected to keep interest rates on hold for the second consecutive time at its meeting on Wednesday. The Bank of England is considered likely to do the same a day later. Figures on Tuesday showed that UK shop inflation had eased to its lowest rate in more than a year due to falling food prices.

However, economists think the slide in inflation is likely to slow as the Israel-Hamas war pushes up energy prices, and as the base effect of comparing energy prices with last year’s high levels diminishes.

“Looking ahead, inflation is unlikely to keep falling this quickly,” said Jack Allen-Reynolds, an economist at consultants Capital Economics. He added that “energy inflation will probably pick up a little in the next few months”.

Inflation within the eurozone still covers a wide range, from 7.8 per cent in Slovakia to minus 1.7 per cent in Belgium for the year to October.

But the sharp slowdown in prices reflected weaker activity in the region’s economy as a whole, which Eurostat said shrank 0.1 per cent in the three months to September. That was below economists’ forecasts and came after contractions in Germany, Ireland and Austria offset growth in Spain and France.

The eurozone economy has barely grown in the past year as consumers and businesses have faced rising borrowing costs, weaker global trade and the biggest surge in the cost of living for a generation. 

Figures released on Monday also confirmed Germany’s place as one of the world’s weakest major economies after its gross domestic product shrank 0.1 per cent.

By contrast, the US economy has rapidly expanded, with annualised third-quarter growth reported at 4.9 per cent last week.

“The eurozone economy is set for a period of economic stagnation, with growth only returning once real income growth turns sufficiently positive,” said Rory Fennessy, an economist at consultants Oxford Economics. “Momentum going into the fourth quarter remains exceptionally weak, weighed down by tight financial conditions.”

Tuesday’s figures showed that core eurozone inflation, which excludes energy and food, fell in line with expectations to 4.2 per cent, down from 4.5 per cent in September. This metric is closely watched by the ECB as a gauge of underlying price pressures.

But ECB president Christine Lagarde warned last week that wage growth was also “critically important to determine the inflation outlook”.

She stressed that details on the next round of collective wage bargaining agreements with unions would only come “way into 2024” — suggesting the bank would wait until then before deciding if it could start cutting borrowing costs.

“The ECB needs to see wage inflation slowing and this could take a further six months,” said Mark Wall, chief European economist at German lender Deutsche Bank.