Euro zone inflation under 2% for first time since 2021

The euro zone's annual inflation rate fell to its lowest level in three and a half years in September, official data showed, dropping below the European Central Bank's 2% target and fuelling expectations of a rate cut.

Year-on-year consumer price increases in the single currency area slowed to 1.8% in September, down from 2.2% in August, thanks to falling energy costs.

The rate for the 20-country euro zone was the lowest since April 2021 and beat predictions of 1.9% by analysts surveyed by financial data firm FactSet.

But core inflation, which strips out volatile energy, food, alcohol and tobacco prices and is a key indicator for the ECB, cooled slightly to 2.7% in September from 2.8% in August, the EU's official statistics agency said.

The central bank's chief Christine Lagarde said yesterday that rate-setters would take the new data on inflation "into account in our next monetary policy meeting in October".

The Frankfurt-based body has already cut borrowing costs twice in recent months, and today's data will raise hopes for another cut at the next meeting on 17 October.

That is a marked change from economists' expectations earlier this year when many experts predicted the next cut would come in December.

The latest figures "should be sufficient to persuade the ECB to cut rates in October, even though services inflation remained high", said Franziska Palmas, senior Europe economist at Capital Economics research group.

The slowdown in inflation comes after energy prices fell sharply by 6% in September, compared with a drop of 3% in August, Eurostat data showed.

Lagarde cautioned against assuming the period ahead would be smooth sailing, and said "inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates".

But she told a European Parliament hearing yesterday that "the latest developments strengthen our confidence that inflation will return to target in a timely manner".

In its latest forecasts, the ECB said it expected inflation in the euro zone to return to a stable 2% by the end of 2025.

Services inflation, which had been accelerating in recent months, slowed to 4% in September, down from 4.1%in August.

But food and drinks prices ticked up slightly, by 2.4% in September compared with 2.3% in August.

Consumer price increases fell below 2% in the European Union's two biggest economies, Germany and France, in September, reaching 1.8% and 1.5% respectively.

Ireland registered the lowest inflation rate in September across the euro zone, at 0.2%, the data showed.