The drop in inflation in the euro area causes the ECB to cut interest rates

Core inflation remains significantly higher than the target inflation level of 2%; however, “at least it’s moving in the right direction,” Field said.

In August’s preliminary inflation figure, the largest contribution is expected to come from services (4.2%, up from 4% in July), followed by food, alcohol and tobacco (2.4%, up from 2 .3% in July), the non-energy industry. 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 fall in the inflation rate in the euro area,” said Ulrike Kastens, European economist at DWS. “They fell 3% in August and ensured cost of living growth slowed to 2.2%.”

Commenting on services inflation, a key measure for the European Central Bank, Bert Colijn, senior economist at ING, said that “in part, the increase was due to French services inflation, which increased following the Olympics in August. in any case, services inflation is still not moving much at the moment.”

Prices fell in most eurozone economies

Country-level data showed a contraction in most eurozone economies. According to preliminary data from the federal statistics office published on Thursday, August 29, prices in Germany were 1.97% higher year-on-year, significantly below consensus expectations of 2.2% and down from 2, 6% in July. In France, the headline inflation rate was 2.2 percent higher than a year earlier, down from 2.7 percent in July, according to statistics agency Insee.

It is the lowest rate in three years, but slightly above expectations, driven by upward pressure from services inflation, particularly strong accommodation and transport services. This can probably be explained by unique price effects related to the Paris Olympics in France.

In Spain, prices surprised slightly lower with a 2.2% increase, according to flash data from the local statistics office. In Italy, the Consumer Price Index rose by 1.1% annually (from 1.3% in July), according to ISTAT’s preliminary estimates. The data is below market expectations of 1.2%, mainly due to prices of non-regulated energy products (-6.0% to -8.6%).

The ECB is expected to cut rates next month

The ECB’s next monetary policy meeting will be held in Frankfurt on September 12, and economists are widely expecting an interest rate cut. Markets are betting on a quarter-point cut in the ECB’s benchmark interest rate to 3.5%.

“With inflation looking set to settle at or around where it needs to be and unemployment steady, the ECB should be reaffirmed in its course of action. This sets us up for further rate cuts this year,” Morningstar’s Field said.

The comment of Natasha May, global market analyst at JP Morgan Asset Management, is in the same vein:

“The September ECB meeting is unlikely to be the most important rate decision this month, but today’s inflation statement paves the way for a second rate cut in the eurozone. To justify pulling the foot further from the brake, the Board of Governors can point to the lowest value of inflation in the last three years.”

The ECB meeting will precede the Federal Reserve’s monetary policy meeting on September 17 and 18. ECB President Christine Lagarde has repeatedly emphasized the European Central Bank’s independence from the Fed, and JP Morgan’s May believes this is for good reason.

“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 decline in inflation was mainly driven by the energy component of the inflation basket, leading wage indicators suggest that even sticky services inflation should moderate in the coming quarters. The numbers could prove bumpy, the Board of Governors should feel comfortable opting for another rate cut before the Fed takes the first step.”

The recently published minutes of the ECB showed that the central bank is still quite cautious about services inflation and second-round effects in the wage data. As a result, “markets await future data to decide on the move, as they are now evenly split on a 25 bps cut in October and ECB officials offered little guidance on this at the Jackson Hole Symposium,” a said Christophe Boucher, boss. investment officer at ABN AMRO Investment Solutions.