Eurozone's Steady But Stubborn Inflation: A Tale of Two Inflation Rates
Recorded inflation rates in the Eurozone plunge to a 3-year low; raises speculations about potential interest rate reductions from the European Central Bank.
In a surprising turn of events, the Eurozone's annual inflation rate plummeted to a three-year low of 2.2% in August 2024. Despite this encouraging news, the ECB's Schnabel issues a word of caution regarding potential rate cuts.
The decline in annual inflation was mainly attributed to a sharp 3% drop in energy prices and favorable base effects. However, the core inflation, which excludes volatile components like energy and food, remained resilient, dipping slightly from 2.9% to 2.8% annually. Services costs continued to drive this trend, escalating by 4.2% year-over-year in August.
"Policy should proceed cautiously, as the current level of headline inflation understates the challenges monetary policy still faces," said Isabel Schnabel, a member of the ECB's Executive Board. Highlighting that domestic inflation remains high at 4.4%, and the services sector continues to face persistent price pressures.
Germany, one of the EU's economic powerhouses, played a significant role in cooling the Eurozone's overall inflation. In August, Germany experienced a 2% year-on-year inflation rate, marking a sharp decrease from the expected 2.3%. This drop was primarily due to a sharp reduction in energy prices.
Contrastingly, Belgium saw a notable surge in inflationary pressures, with its harmonized inflation rate rising by 1.6% compared to July 2024. This significant increase marked a turning point from the 0.6% decline observed in July.
The euro strengthened against the dollar following the release of the inflation data, with the single currency trading at 1.1080 USD. European stocks continued their upward trend, with the Euro Stoxx 50 gaining 0.6%, positioning itself for a fourth consecutive week of gains.
The Eurozone's core inflation, which stood at 2.4% in March 2025, has continued to moderate from previous highs, as wage growth decelerates, and profit margins absorb labor costs. The ECB cut key interest rates by 25 basis points on April 17, 2025, citing progress in disinflation and expectations that core price growth will stabilize around its 2% target.
This balancing act reflects the ECB's effort to anchor inflation expectations while responding to deteriorating growth prospects and global trade tensions. Core inflation is projected to remain sticky, with the 2025 forecast revised up to 2.2%.
- Eurostat data from March 2025 revealed that the Eurozone's core inflation had moderated, standing at 2.4%.
- In April 2025, the European Central Bank (ECB) cut key interest rates by 25 basis points, citing progress in disinflation and expectations that core price growth would stabilize around its 2% target.
- Despite the ECB's interest rate cut in April 2025, the accessibility to affordable finance for businesses is still a matter of concern due to the persistence of high inflation rates, a factor that could affect the economy's growth prospects.
