The eurozone's Consumer Price Index rose 2.2% year on year in August, according to Eurostat's flash estimate, down from 2.6% in July and in line with economists' expectations. And the core inflation rate, which shows prices without energy and food costs, was slightly down at 2.8%, from 2.9% in July.
“After the spike in inflation we witnessed in July, investors will be glad to see that this number abated in August, falling back to 2.2%,” said Michael Field, European market strategist at Morningstar. “This 40 basis point fall now puts us back within touching distance of the European Central Bank’s targeted level.”
Core inflation remains materially higher than the 2% targeted inflation level; however, "it is at least moving in the right direction," said Field.
In August's preliminary inflation figure, the greatest contribution is expected to come from services (4.2%, compared with 4% in July), followed by food, alcohol and tobacco (2.4%, compared with 2.3% in July), non-energy industrial goods (0.4%), energy (-3%, compared to +1,2% in July) and according to Eurostat.
"Falling energy prices were the driving force behind the expected decline in the inflation rate in the eurozone," said Ulrike Kastens, European economist at DWS. "They fell by 3% in August and ensured that the rise in the cost of living slowed to 2.2%."
Commenting on service inflation, a key metric for the European Central Bank, Bert Colijn, senior economist at ING, said that "in part, the increase was because of French services inflation, which ticked up on the back of the Olympics in August. In any case, services inflation is not yet moving down much for the moment."
Prices Went Down in Most Eurozone Economies
Country-level data showed a fall in most of the eurozone economies. According to preliminary data from the federal statistics office released on Thursday, August 29, in Germany prices were 1.97% higher year on year, notably below consensus expectations for 2.2%, and down from 2.6% in July. In France, the headline inflation rate was 2.2% higher year on year, down from 2,7% in July, according to statistic agency Insee.
It is the lowest rate in three years, but slightly above expectations, driven by upside pressure from services inflation, in particular, strong accommodation and transport services. This can likely be explained through one-off pricing effects related to the Paris Olympics in France.
In Spain, price rises surprised slightly to the downside with a 2.2% increase, according to flash data from the local statistics office. In Italy, the Consumer Price Index increased by 1.1% on annual basis (from 1.3% in July), according to ISTAT’s preliminary estimates. The data are below market expectations of 1.2%, mainly due to the prices of non-regulated energy products (from -6.0% to -8.6%).
ECB Expected to Cut Rates Next Month
The next ECB monetary policy meeting will take place in Frankfurt on September 12, and economists largely expect an interest rate cut. Markets are betting on a quarter-point cut in ECB's benchmark interest rate to 3.5%.
“With inflation seemingly settling at or around where we need it to be, and unemployment stable, the ECB should be reaffirmed in its course of action. This sets us up nicely for further rate cuts this year,” said Morningstar's Field.
Natasha May, global market analyst at J.P. Morgan Asset Management, said:
“The ECB’s September meeting is unlikely to be the most consequential rate decision of the month, but today’s inflation release clears the way for a second eurozone rate cut. To justify taking its foot further off the brake, the Governing Council can point to the lowest headline inflation reading in three years.”
The ECB meeting will be ahead of Federal Reserve's on monetary policy that will take place on September 17 and 18. The ECB President, Christine Lagarde, has several times stressed the European Central Bank independence from the Fed, and JP Morgan's May thinks this is for good reasons.
"Eurozone inflation is closer to target, eurozone financial conditions are much tighter, and activity data has been weaker," she said.
"And while this month’s inflation decline was mostly driven by the energy component of the inflation basket, forward-looking wage indicators suggest even sticky services inflation should ease over the coming quarters. Broadly, the ECB’s hawkishness has had the intended effect. While upcoming inflation numbers could prove bumpy, the Governing Council should feel comfortable opting for another rate cut before the Fed takes its first step.”
The ECB’s minutes recently published minutes showed the central bank is still quite wary of services inflation and second-round effects in wage data. Consequently, "markets are waiting for upcoming data to decide on the move, as they’re now evenly divided over a 25-bps cut in October and ECB officials offered little guidance on this in the Jackson Hole Symposium", said Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions.
