FRANKFURT, Germany — The inflation burdening Europeans fell sharply in September, boosting hopes that consumers will eventually get relief from more expensive groceries, vacations and haircuts — and that the European Central Bank won’t have to tighten the economy any further. limit by raising interest rates from already record highs.
The annual rate this month was 4.3 percent, down from 5.2 percent in August. But recent higher oil prices cast a shadow over the prospects for bringing inflation back to the central bank’s target of 2 percent.
Core inflation, which excludes volatile fuel and food prices, fell more than analysts expected – from 5.3 percent to 4.5 percent, according to data released Friday by the European Union’s statistics agency Eurostat. The ECB is closely monitoring this figure to assess how inflation is falling.
The decline in core inflation “reinforces our view that the ECB is done raising interest rates,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. He predicted that headline inflation would fall to 3.5 percent by the end of the year.
Food prices ‘uncomfortably’ high
Energy prices fell by 4.7 percent in September, while food price inflation remained uncomfortably high at 8.8 percent.
The figures in the major economies that use the euro were mixed. Annual inflation in Germany fell to 4.3 percent in September from 6.4 percent a month earlier, while in Spain it rose from 2.4 percent to 3.2 percent.
However, economists warn that the big drop in Germany, the largest economy of the 20 eurozone countries, was exaggerated by a statistical quirk: the end of a subsidized ticket and a fuel subsidy in September 2022, which had caused consumer prices to rise that month .
The latest inflation figures may follow the ECB’s latest rate hike in its rapid series of rate hikes. It took the key deposit rate to a record high of 4 percent this month, compared with minus 0.5 percent in July 2022.
ECB President Christine Lagarde said if interest rates were maintained for a “sufficiently long period” it would make a substantial contribution to bringing inflation back to 2 percent, a target the bank does not expect to reach before 2025.
High prices are holding Europe’s economy back because people’s salaries don’t go as far as they used to in paying their bills, forcing them to cut back on other expenses.
Economic growth has stagnated to just above zero in the first six months of the year, with some indicators pointing to a slowdown in the current quarter from July to September.
This burst of inflation was triggered as the global economy recovered from the COVID-19 pandemic, leading to shortages of parts and raw materials. Things got worse when the Russians invaded Ukraine, sending energy prices soaring as Moscow cut off most of the natural gas to Europe.
Bottlenecks in the supply chain
Supply chain bottlenecks and energy prices have eased, but inflation has worked its way through the economy. Prices are higher for services such as haircuts and hotel stays, and workers have demanded wage increases to make up for their lost purchasing power.
The ECB has tried to control inflation by raising interest rates, making it more expensive to borrow for major purchases, such as homes or new factory equipment to expand a business. This reduces the demand for goods and therefore inflation.
But higher interest rates could also weigh on economic growth, leaving the central bank facing a balancing act on how far to go.
Many economists think the ECB is done raising rates unless something drastic happens to prevent inflation from falling further. That could mark a further rise in oil prices, which have risen recently after major producers Saudi Arabia and Russia extended production cuts.