Eurozone inflation fell to three-year low in run-up to ECB's second rate cut
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Eurozone inflation fell to a three-year low in August as the European Central Bank prepared for its second interest rate cut of this year, new figures from Eurostat show.
Inflation across the 20-country bloc dropped to 2.2% last month, the lowest since July 2021 and down from 2.6% in July, the EU statistics agency found.
Irish inflation, as measured by the Harmonised Index of Consumer Prices (HICP), dropped to 1.1%, down from 1.5% in the previous month, with Ireland having the joint third lowest rate of inflation across the Eurozone.
The lowest annual rates were measured in registered in Lithuania at 0.8%, Latvia at 0.9% and Ireland, Slovenia and Finland at 1.1%. The highest annual rates were recorded in Romania at 5.3% and Belgium at 4.3%.
Compared with July 2024, annual inflation fell in twenty Member States, remained stable in one and rose in six.
Core inflation, which excludes volatile food and energy prices, remained unchanged at 2.8%, highlighting underlying price pressures which are lingering well above the European Central Bank's target of 2%.
In August, the highest contribution to the Eurozone's annual inflation rate came from services, which climbed 1.88 percentage points, followed by food, energy and tobacco which increased by 0.46 percentage points.
Services inflation, which accounts for almost 45% of the HICP, increased from 4% to 4.1% in the month, maintaining the highest inflation rate among consumer items.
The ECB returned to its roadmap of rate cuts with a further 0.25% reduction in its deposit facility rate last week, bringing instant relief to tracker mortgage customers. The rate cuts were very much in line with market expectations, but much uncertainty surrounds the future pace of easing.
President Christine Lagarde emphasised the ECB was not pre-committing, and it would continue to take a meeting-by-meeting approach meaning the declining path of rates is not predetermined.
The ECB will be watching the Federal Reserve closely as it is set to cut US short-term borrowing costs on Wednesday, a watershed moment that should start to ease some of the financial pressures consumers have felt over the two-and-a-half years that the central bank has battled with high inflation.
After 5.25 percentage points of increases between March 2022 and July 2023, the Fed is seen deciding between a quarter-percentage point cut in its key rate to the 5.00%-5.25% range, or a half-point reduction to 4.75%-5.00% to address rising worries about the cooling labor market.
Whether it starts big or small, the central bank is widely expected to keep lowering rates to around 4.5% or even 4% by the end of the year, with more cuts in 2025.