The euro-area experienced a significant reduction in core inflation rates, according to data released by Eurostat on Friday, reaching its most gradual year-on-year pace. This downward trend supports the hypothesis that the European Central Bank (ECB) will maintain its interest rates to assess the effects of its ongoing, alternative sequence of rate increases.
On a year-on-year basis, the core prices rose by 4.5% in September. This data, which excludes volatile energy and food costs, dropped from 5.3% in August, undershooting the 4.8% average prediction in a Bloomberg economist survey.
The general inflation rate also slowed to 4.3%, from 5.2% previously, a near two-year low. Lower energy prices mainly fueled this decline, but the service sector also experienced a rapid slowdown. The German bond market rallied following these reports, with the ten-year yield down by eight basis points, its largest dip since August.
A summer of statistical abnormalities previously supported the growth in core prices. However, these latest figures conclusively suggest that core price growth is on a steady downward trajectory. However, even with this decline, both core and headline inflation are still above the ECB's 2% target, indicating that markets will need to prepare for continued high borrowing costs.
Inflation trends differ within the 20-member euro-zone. Germany recorded a two-year low in inflation rates this month, whereas Spain saw inflation rise to over 3%. Market participants and economists presently do not anticipate that the ECB will add to the ten consecutive rate hikes since July 2022 that pushed the deposit rate to 4%.
Similarly, in the US, the Federal Reserve estimates that its key inflationary measure fell below 4% in August, and officials suggest that rates have almost peaked.
Francois Villeroy de Galhau, head of France's central bank, stated that the current borrowing costs were "appropriate" and that the latest data increases optimism in the ECB's ability to reduce inflation to its target.
There are signs that the ECB's actions have impacted the economy, perhaps strengthening the case for maintaining the current rates. Businesses borrowing in August grew at its slowest rate in nearly eight years. German companies are feeling the pinch worst of all, with the economy projected to contract this quarter. Despite this, wages are on the rise, suggesting a potential consumption-led rebound by year-end.
Nevertheless, wage inflation might slow the disinflation process. The trajectory of price gains might not be clear until 2024, according to ECB Chief Economist Philip Lane.
Interest rates will likely stay at their current level for the foreseeable future, despite the possibility of future increases, according to Martins Kazaks, the Latvian central bank chief.