Eurozone inflation hits two-year low

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Eurozone inflation has fallen to its lowest level for almost two years, bolstering hopes that the biggest surge in consumer prices for a generation is fading fast and paving the way for the European Central Bank to halt interest rate rises.

European government bonds rallied after the better than expected figures for eurozone and French inflation were published, while equity markets strengthened.

Consumer prices in the single currency bloc rose 4.3 per cent in the year to September, down from 5.2 per cent in August, according to Eurostat, the EU statistics arm. Economists polled by Reuters had expected a rise of 4.5 per cent.

The last time inflation was lower was in October 2021.

Core inflation, which excludes energy and food and is closely watched by the ECB as a gauge of underlying price pressures, also fell more than expected to 4.5 per cent, down from 5.3 per cent in August.

Economists said there were clear signs of underlying price pressures cooling. “The sequential easing looks broad-based, beyond base effects,” Frederik Ducrozet, of Pictet Wealth Management, wrote on X, the social media platform formerly known as Twitter.

The sharp slowdown in inflation added to investors’ hopes that the ECB will end its unprecedented string of 10 consecutive interest rate increases when its governing council meets in Athens on October 26.

The central bank has raised its benchmark deposit rate from an all-time low of minus 0.5 per cent to a record high of 4 per cent, lifting borrowing costs for households, businesses and governments in an attempt to constrain activity and cool price pressures.

“This reinforces our view that the ECB has finished raising interest rates,” said Jack Allen-Reynolds, an economist at research group Capital Economics. “Nevertheless, we continue to think that the bank won’t start cutting rates until late 2024.”

Inflation in the eurozone has fallen from a peak of 10.6 per cent last year. Price pressures in the bloc have receded more slowly than in the US, which reported inflation of 3.7 per cent in August, but faster than in the UK, where inflation was 6.7 per cent last month.

Following turmoil in European bond markets on Thursday, Italian 10-year government bond yields fell 0.15 percentage points to 4.76 per cent on Friday, down from their highest level in a decade.

German 10-year bond yields slipped 0.1 percentage points to 2.85 per cent, having also hit a 10-year high during the previous trading session.

The euro strengthened 0.4 per cent against the dollar to $1.0603. In equity markets, Europe’s region-wide Stoxx 600 added 1 per cent and Germany’s Dax rose 0.6 per cent. London’s FTSE 100 rose 0.6 per, while France’s Cac 40 index gained 0.7 per cent.

Price growth slowed in 15 of the 20 eurozone members and came in below the ECB’s 2 per cent target in two of them. Prices fell in the Netherlands by 0.3 per cent from a year ago. The bloc’s highest inflation rate was 8.9 per cent in Slovakia.

The removal of last year’s cheap German public transport tickets and fuel prices from the annual comparison pushed inflation down, while France’s recent cut in its electricity subsidy lifted energy prices.

The eurozone economy is widely expected to shrink in the third quarter and separate data published on Friday added to these fears after German retail sales fell for the third consecutive month in August, dropping 1.2 per cent from July. French household spending fell 0.5 per cent in the same period.

Despite the recent jump in oil prices, the cost of energy in the eurozone fell 4.7 per cent in the year to September, a faster decline than the previous month. There were also falls in food, alcohol and tobacco inflation to 8.8 per cent and in goods inflation to 4.2 per cent. Services inflation slowed to 4.7 per cent, dragged down by a sharp monthly fall in airfares.