Eurozone inflation modest decrease in August could stifle further interest rate hikes

LONDON (ICIS)–Eurozone inflation edged down in August, according to the latest data from the EU’s statistics agency Eurostat on Tuesday.

Annual inflation declined to 5.2%, modestly down from the 5.3% level recorded in July, but significantly lower than the 9.1% rate recorded a year prior.

This trend was reflected in the wider EU, with the 27-country bloc tracking 5.9% inflation in August, down from 6.1% the previous month and 10.1% in August 2022.

Inflation remains higher than the European Central Bank (ECB) target of 2%, but is softening which could allay concerns over future interest rate hikes in the near term.

Services accounted for the highest contribution to inflation in the eurozone, up 2.41 percentage points (pp), followed by a 1.98 pp increase from the food, alcohol and tobacco segment.

Non-energy industrial goods tracked a 1.19 pp gain in August, while energy was the only market to track a decline, falling 0.34 pp compared to the previous year.

Energy is not expected to remain on this trajectory, according to analysts at Oxford Economics, as prices have started to rise for the sector, and demand will increase heading into winter.

“Despite elevated volatility in food and energy inflation, we see core inflation coming down and concerns about growth supporting our view that we have seen the last rate hike by the ECB,” said Oxford Economics.

“Should the weaker growth outlook materialise in new data releases, the ECB may be forced to update their economic assessment which leads us to expect rate cuts starting in April next year.”

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