Eurozone Inflation Drops Below the ECB’s 2% Target in September

On Tuesday, October 1, Eurozone inflation figures fueled speculation about an October ECB rate cut.

Eurozone Inflation Rate Drops Below 2% Target

The Eurozone’s annual inflation rate declined from 2.2% in August to 1.8% in September. Analysts expected a September annual inflation rate of 1.9%. Significantly, the annual inflation rate dipped below the ECB’s 2% target for the first time since April 2021.

Key Contributors to Inflation Drop: Energy Prices

According to Eurostat,

• Energy prices declined by 6.0% in September 2024, compared with September 2023, making it the main contributor to the fall in producer prices.
• Services had the largest annual contribution, with an annual rate of 4.0%, down from 4.1% in August.
• Food, alcohol, and tobacco had an annual rate of 2.4% compared with 2.3% in August.

Core Inflation Unexpectedly Softens

The Eurozone’s core inflation rate eased from 2.8% in August to 2.7% in September. Analysts expected the core inflation rate to remain at 2.8% in September.

Notably, core inflation eased to the lowest rate since February 2022.

Eurozone Inflation Impact on the ECB Rate Path

The softer-than-expected annual inflation rate could boost speculation about an October ECB rate cut. Significantly, the ECB has two monetary policy meetings remaining in 2024, the first being on October 17, while the second is scheduled for December 12.

A 25-basis point October ECB interest rate cut could pave the way for a 25-basis point December rate cut.

Expert Views on Eurozone Inflation and the ECB Rate Path

Jeroen Blokland, founder of the Blokland Smart Multi-Asset Fund reacted to the inflation report, stating,

“Eurozone inflation dropped to 1.8% in September. First sub-2% reading since June 2021. Inflation in the major Eurozone economies is lower. The ECB only needs to use the word deflation to cut rates massively.”

EUR/USD Reaction to Eurozone Inflation

Before the inflation report, the EUR/USD climbed to a high of $1.11437 before falling to a low of $1.10976.

On Tuesday, October 1, the EUR/USD was down 0.24% to $1.11080.