Euro Zone Inflation Hits Lowest Level Since July 2021 in October

Shoppers are seen purchasing an assortment of fruits at a local market in Nice, France on June 8, 2023.
Photo: REUTERS/Eric Gaillard

Euro zone inflation has experienced a significant decline, reaching its lowest level since July 2021 in October. This decrease in inflation, accompanied by a contracting economy, can be attributed to the series of interest rate hikes by the European Central Bank (ECB).

According to a flash reading from Eurostat, prices only rose by 2.9% in October, compared to double-digit figures recorded a year ago. This decline, while addressing concerns of persistently low inflation, has had negative repercussions on the euro zone economy. The separate Eurostat release reveals a 0.1% shrinkage in the economy during the third quarter, indicating a possible recession.

These new data suggest that the ECB has likely completed its interest rate hikes, now awaiting the effects of these measures before making further adjustments. Daniele Antonucci, the chief investment officer at Quintet Private Bank, anticipates that interest rates will remain at their current levels for the time being but expects rate cuts to occur from the middle of next year.

Yannis Stournaras, the governor of the Greek central bank, has also mentioned the possibility of rate cuts next year if inflation stabilizes below 3%. However, Joachim Nagel, a more hawkish member of the ECB from Germany, has not ruled out the potential for additional interest rate hikes. Francois Villeroy de Galhau of France, seen as a more centrist policymaker, believes that rates should remain unchanged as long as necessary.

The decrease in headline inflation can be attributed to the base effects caused by the significant increase in energy prices compared to the previous year. Inflation, excluding energy, food, alcohol, and tobacco, experienced a more moderate decline to 4.2%, the lowest level since July 2022. The slowdown in inflation was minimal in the services sector, possibly due to rising wages.

Despite these developments, it may take another six months for the ECB to observe a slowdown in wage inflation. The return to the ECB’s target inflation rate of 2% is not expected until 2025, according to the ECB’s own estimates.

While the last quarter of the year is predicted to see further economic contraction, economists believe that a sharp recession is not imminent. However, the economic environment remains uncertain due to ongoing conflicts in Ukraine and Gaza, which could potentially exacerbate the situation in the euro zone. The impact of higher interest rates on the economy, coupled with geopolitical instability, is expected to weigh on economic activity in the coming quarters.

Source: Reuters

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