Eurozone inflation fell to its lowest level in three years in August, according to the latest data from Eurostat, as the European Central Bank prepares to cut interest rates for the second time this year.
Inflation across the 20-nation EU fell to 2.2% last month, the lowest since July 2021, down from 2.6% in July, according to Eurostat.
Ireland's inflation rate, as measured by the Harmonised Index of Consumer Prices (HICP), fell to 1.1% from 1.5% the previous month, making it the third lowest in the euro zone.
The lowest annual rates were recorded in Lithuania (0.8%), Latvia (0.9%), Ireland, Slovenia and Finland (1.1%). The highest annual rates were recorded in Romania (5.3%) and Belgium (4.3%).
Compared to July 2024, annual inflation fell in 20 Member States, remained stable in 1 Member State and rose in 6 Member States.
Core inflation, which excludes volatile food and energy prices, was unchanged at 2.8%, highlighting continued underlying price pressures well above the European Central Bank's 2% target.
The services sector was the largest contributor to euro area annual inflation in August, rising 1.88 percentage points, followed by food, energy and tobacco, which increased 0.46 percentage points.
Services inflation, which accounts for about 45% of the HICP, rose to 4.1% from 4% during the month, remaining the highest inflation rate among consumer goods.
The ECB cut its deposit rate by another 25 basis points last week, returning to its roadmap of rate cuts and providing immediate relief to tracker mortgage customers. The rate cut was broadly in line with market expectations, but there is a lot of uncertainty about the pace of future easing.
President Christine Lagarde stressed that the ECB does not make any advance commitments and will continue to adopt a meeting-by-meeting approach, so the path for lowering interest rates is not predetermined.
The ECB will be closely watching as the Federal Reserve is due to cut short-term U.S. borrowing costs on Wednesday, marking a turning point that could begin to ease some of the financial pressures consumers have felt during the two-and-a-half years that central banks have been battling high inflation.
After raising interest rates by 5.25 percentage points between March 2022 and July 2023, the Fed is expected to decide whether to cut rates by 0.25 percentage point to a 5.00% to 5.25% range or 0.5 percentage point to 4.75% to 5.00% to address growing concerns about a cooling labor market.
Whether big or small, central banks are widely expected to continue cutting interest rates to around 4.5% or even 4% by the end of the year, with further cuts in 2025.
