(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.
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 2022.
“Our meeting on Sept. 12 should in my view take action,” French central-bank chief Francois Villeroy de Galhau said in remarks published Friday by Le Point magazine. “It would be fair and wise to decide on a new rate cut.”
But while his Portuguese counterpart 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.
What Bloomberg Economics Says...
“This is good news for the ECB, but we expect the Governing Council will be more focused on the unwelcome rise in services inflation instead. This probably won’t be enough to deter the ECB from cutting rate by 25bps in September. Sticky underlying pressures will, however, add to the case for it to maintain a gradual, quarterly pace of easing.”
—Maeva Cousin, economist. Click here for full REACT
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.
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 another ECB rate cut. Others, though, remain firmly focused on inflation, which a Bloomberg Economics nowcast sees edging up to 2.3% in September.
“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 Ott Tammik, Andrej Sokol (Economist), Joel Rinneby, Barbara Sladkowska, Guy Johnson, Kriti Gupta, Oliver Crook, Craig Stirling and William Horobin.
(Updates with French central-bank head in sixth paragraph.)
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