Euro area – inflation flirts with the 2%-mark

The inflation rate in the eurozone fell sharply to 2.2% in August, bringing it close to the ECB's target of 2%.

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Dr Vincent Stamer

Commerzbank Economic Research

08/30/2024

The main reason for this was a drop in energy prices, while the core inflation rate fell only slightly to 2.8%. Nevertheless, the ECB is likely to use the inflation trend in August as an opportunity to cut interest rates further. However, inflation is likely to rise again by the end of the year – not least due to the persistent upward pressure on prices for services.

Inflation rate falls significantly in August, ...

According to preliminary data from Eurostat, the inflation rate fell to 2.2% in August (from 2.6% in July). Inflation thus met the expectations of the economists surveyed in advance (Table 1). This significant decline is primarily due to lower energy inflation (from 1.2% in July to -3.0). The core inflation rate, excluding the often highly volatile prices of energy and food, fell only slightly to 2.8%, in line with expectations. It therefore remains well above the ECB's target of 2%. As the previous year's rate for the important services component remains stubbornly at the 4% mark and even rose to 4.2% in August, this is unlikely to change in the coming months.

... and could dip below 2% in September

The inflation rate will also be significantly influenced by the movement of energy prices in the coming months, partly due to their strong movements in the past year. For example, the rate of energy inflation fell noticeably this month not only because energy prices fell compared to the previous month. Rather, it was also because prices had risen significantly in August 2023, which now dropped out of the year-on-year comparison. As energy prices continued to rise noticeably in September last year, the rate of energy inflation will continue to fall in the coming month, even if current energy prices stabilize. The overall inflation rate could therefore even slip below the 2%-mark in September.

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