Euro zone inflation fell to its lowest level in two years in September, new data showed, suggesting that the European Central Bank's steady rate hikes have succeeded in curbing runaway prices at the risk of slowing economic growth.
Data released by Eurostat on Friday (September 29) showed that consumer prices in the 20 countries of the euro zone rose by 4.3% in September, the lowest increase since October 2021, compared with a previous reading of 5.2%.
The decline in inflation was broad-based, with the pace of growth moderating across all price categories, and energy prices falling entirely for the fifth consecutive month.
In addition, eurozone core inflation (excluding food, energy, alcohol and tobacco) fell from 5.3% to 4.5%, the biggest drop since August 2020. It is also an indicator that the ECB has been watching closely as a better gauge of underlying trends.
The figures are likely to strengthen the European Central Bank's resolve to bring down inflation, having already raised interest rates enough to bring inflation down to its 2 percent target by 2025 after being caught off-guard by a surge in inflation starting in 2021.
"Base effects play a key role in explaining the sharp drop in inflation, but the data also suggest that underlying inflationary pressures are becoming less intense," said Diego Iscaro, head of European economics at S&P Global Market Intelligence.
"These data reinforce the view that interest rates may have reached their peak in the current tightening cycle."
A separate report showed German import prices recorded their biggest year-on-year fall in August since November 1986. Because Germany sources many intermediate goods and raw materials from abroad, import prices tend to lead consumer prices.
Will there be a recession?
Inflation in the eurozone briefly hit double digits last autumn, hit by soaring energy costs, post-pandemic supply chain disruptions and high government spending.
In response, the ECB has raised its key interest rate from a low of -0.5 per cent to a record high of 4.0 per cent in just over a year.
But the economic impact of the most dramatic tightening cycle in the ECB's nearly 25-year history is becoming clearer, with some indicators pointing to a possible recession in the euro zone.
German retail sales fell in August and unemployment rose in September, data showed earlier on Friday, confirming the euro zone's largest economy may be heading for its second recession this year.
The ECB has so far stuck to its forecast for an economic rebound next year, thanks in part to rising real wages as inflation falls.
However, Dirk Schumacher, economist at Natixis, said the outlook was predicated on the external environment not deteriorating further and investment remaining resilient.
Schumacher added, "Interest rates are rising much faster than before, so using the past as a template can be misleading."