Eurozone’s annual inflation fell sharply to 2.2 per cent in August – a three year low – moving from 2.6 per cent in July.

This latest movement is raising expectations that the European Central Bank (ECB) will cut interest rates again later this month. The movement is consistent with market expectations to mark the softest increase in consumer prices since July of 2021, according to a flash estimate.

The European Statistical Agency (Eurostat) is reporting that core inflation, excluding energy, food, alcohol and tobacco eased to 2.8 per cent from 2.9 per cent. Meanwhile, business sentiment among companies in Germany, the Eurozone’s largest economy, fell for the third consecutive month.

More pessimistic expectation

The closely watched Ifo Business Climate Index dropped to 86.6 in August from 87.0 in July, as expectations became more pessimistic, reflecting declining orders and weak investment. The latest inflation results contrasted from a series of months with stickier inflation above the 2.5 per cent threshold.

This is indicative of the slight progress towards the ECB’s 2 per cent target and aligning with a backdrop that favours interest rates by the central bank. 

The slowdown in inflation is due to the sharp decline in energy costs as base effects kicked in August (-3 per cent vs 1.2 per cent in July), while inflation slowed for non-energy industrial goods (0.4 per cent vs 0.7 per cent). On the other hand, inflation picked up for services (4.2 per cent vs 4 per cent) and food, alcohol, and tobacco (2.4 per cent vs 2.3 per cent). 

Excluding energy and unprocessed food, price growth was unchanged at 2.8 per cent. From the previous month, the currency bloc’s HICP edged higher by 0.2 per cent in August.