Mon, 04 Dec 2023

FRANKFURT, Germany: Inflation in the eurozone hit a two-year low in September, signaling that the European Central Bank's (ECB) strategy of steadily increasing interest rates was successfully curbing rising prices, albeit with potential consequences for economic growth.

Consumer prices in the 20 euro-sharing countries increased by 4.3 percent in September, the slowest rate since October 2021, down from 5.2 percent in the previous month, as reported by Eurostat's preliminary data.

Core inflation, which excludes food, energy, alcohol, and tobacco and is closely monitored by the ECB, dropped from 5.3 percent to 4.5 percent, marking the most significant decline since August 2020. These figures could reinforce the ECB's belief that it has raised interest rates sufficiently to bring inflation back to its two percent target by 2025, following the surge that began in 2021.

Diego Iscaro, Head of European Economics at S&P Global Market Intelligence, stated, "The figures reinforce the view that interest rates have likely reached their peak in the current tightening cycle." The decline in inflation was widespread, with all price categories experiencing slower growth and energy prices falling for the fifth consecutive month.

The ECB's aggressive tightening cycle, with its key interest rate reaching a record 4.0 percent from a low of minus 0.5 percent in just over a year, aimed to combat soaring energy costs, post-pandemic supply chain disruptions, and increased government spending that briefly pushed eurozone inflation into double digits last autumn.

However, the impact of the ECB's most substantial rate hikes in nearly 25 years was starting to show, with indicators hinting at a potential eurozone recession. German retail sales declined in August, and unemployment rose in September, raising concerns about a second recession in the eurozone this year.

While the ECB maintains its outlook for an economic rebound next year, potential risks include further deterioration in the external environment, particularly in China, where the economy is slowing, and resilience in investment.

Dirk Schumacher, an economist at Natixis, noted, "The rise in interest rates has been much quicker than in previous times, so looking to the past as a model may mislead."

The 20 countries making up the eurozone are:

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