The time for interest rate cuts in the euro zone and the US is approaching after data on Friday showed a slowdown in inflation.
In the euro area, inflation eased in August to 2.2% from 2.6% in July, making a second rate cut by the ECB at next month’s meeting almost certain. This is the lowest inflation rate since July 2021, before inflation began to rise and peaked at 10.6% in October 2022. The fall in annual inflation in August was mainly due to a large 3% fall in energy prices. In the US, the Fed’s focus on inflation showed a marginal increase in July, which is unlikely to affect the Federal Reserve’s plans to cut interest rates in September.
In detail:
Eurozone inflation eased in August to 2.2% from 2.6% in July, making a second rate cut by the ECB at next month’s meeting almost certain.
This is the lowest inflation rate since July 2021, before inflation started to rise, peaking at 10.6% in October 2022. The fall in annual inflation in August was mainly due to the large 3% fall in energy prices. This positive development is seen as a way to finalise the ECB’s interest rate cut at its Governing Council meeting on 12 September. It is worth recalling that the ECB was the first central bank to cut interest rates, in June, from 4% to 3.75%.
Even the perceived par excellence “hawk” ECB Executive Board member Isabelle Schnabel has come out in favor of cutting interest rates, saying a further gradual reduction would not derail the deflation process, as some members fear. “Since a return to price stability depends on a set of critical assumptions, policy should proceed gradually and cautiously,” she said in a speech in Tallinn, Estonia. “The pace of policy easing cannot be mechanical. It must be based on data and analysis,” she added. “We can be increasingly confident that interest rate cuts are possible in September,” Estonian central bank governor Mandis Mueller also told Bloomberg in Tallinn.
The markets they are betting on two or three more falls by the ECB this year, in addition to further measures in 2025. However, prices in the services sector rose to 4.2%, from an already high rate of 4%. Their increase is, however, seen as a result of the Paris Olympics and the strengthening of workers’ purchasing power following recent wage increases. Core inflation, which excludes volatile food and energy prices, also eased to 2.8%, from 2.9% in July.
Among member states, the fall in inflation in Germany contributed most to the largest decline in the euro area. Germany’s harmonised index of consumer prices fell to 2% in August, significantly below the 2.3% expected.
Deflation
On a monthly basis, Germany recorded deflation with prices falling by 0.2% due to a sharp drop in energy prices. Other Member States recording negative inflation in August were Lithuania (0.5%), Finland (0.5%), Latvia (0.4%), Italy (0.1%), Austria (0.1%) and Portugal (0.1%).
Belgium was one of the member states that reported an increase in inflation of 1.6% compared to a decrease of 0.6% in July, recording the largest monthly increase since February 2024. Year-on-year, Belgium recorded the highest inflation at 4.5%, although this is lower than the 5.4% in July, followed by Estonia at 3.4%, the Netherlands at 3.3%, Slovakia at 3.2% and Greece at 3.1%. The lowest levels of annual inflation were in Latvia (0.9%) and Finland, Ireland and Slovenia (all three at 1.1%). Eurostat also announced data on employment, with unemployment in the euro area falling from 6.5% to 6.4% in August.
Marginal increase in July in the US
In the US, the preferred inflation gauge the Fed focuses on showed a marginal increase in July, which is unlikely to affect the Federal Reserve’s plans to cut interest rates in September.
The structural index
The so-called structural index of individual consumer spending, which excludes volatile food and energy prices, rose 0.2% in July from June. On an annual basis, it rose 1.7%, which is the lowest rate of the year. Fed officials focus more on the structural index because it is more representative of longer-term trends.
The Fed’s moves
Friday’s data reinforces the estimate that the Fed will begin to lower interest rates starting next month, as its chairman, Jerome Powell, had announced earlier in Jackson Hole. Powell had stated in the clearest terms last Friday that “the time has come” to start cutting interest rates, reinforcing estimates that the Fed will begin monetary easing policy at its meeting, on September 17-18, with a reduction in interest rates of around 0.25