A woman takes a selfie, with the Eiffel Tower in the background, on Rue Surcouf in Paris, on July 23, 2024, ahead of the Paris 2024 Olympic Games.
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Euro zone inflation fell to a three-year low of 2.2% in August, preliminary figures from the European statistics agency Eurostat showed on Friday, boosting expectations of an interest rate cut by the European Central Bank in September.
The decline from 2.6% in July was in line with expectations of economists polled by Reuters.
The core rate – excluding more volatile components such as energy, food, alcohol and tobacco – fell to 2.8% in August from 2.9% in July, also in line with a Reuters poll.
The euro extended its slide against the pound following the data, trading down 0.1% at £0.8408. The euro rose 0.04% against the US dollar to $1.1083, as investors brace for the US Federal Reserve to cut interest rates in September in its first easing move of the current cycle.
This comes after price increases in Germany, the eurozone's largest economy, slowed more than expected to 2% during the month, on a consolidated basis in the eurozone.
Economists at ING expect core inflation in the eurozone to remain steady above 2.5% for the rest of the year amid steady prices for goods and services.
Markets have fully priced in the possibility of the European Central Bank cutting interest rates by another 25 basis points in September, after the institution delivered its first rate cut in June, and for another 25 basis points before the end of the year.
There are, however, details in the statement that will worry ECB policymakers, particularly services inflation at 4.2%, said Kyle Chapman, FX analyst at Ballinger Group.
“The positive headline is purely due to energy price impacts, and it masks the fact that little progress has been made on fundamental pressures here,” Chapman said in a note.
“Now at its highest level since last October, services price inflation has been stuck in the 4% area for almost a year now, and has been trending in the wrong direction since the spring.”
The central bank is on track to cut interest rates further, Ed Smith, co-chief investment officer at Rathbones Asset Management, told CNBC's “Squawk Box Europe” on Friday, pointing to ECB President Christine Lagarde's focus on wage inflation.
“Negotiated wages are very important in the euro area, accounting for around 80% of the workforce that is being negotiated. The large drop in negotiated wages in the euro area in Q2, and other indicators such as Indeed.com’s lists… and the ECB’s telephone survey of companies… also point to lower wage intentions.”
“But there is some stickiness, with the latest PMI numbers and service sector surveys showing some stickiness in price components,” he added, noting that this would keep some ECB voting members cautious.
