Inflation in the euro zone experienced a slight acceleration in September, according to recent data. The inflation rate for the 20 nations sharing the euro rose to 2.2% in September, up from 2.0% in August, aligning with economists’ expectations. This increase was primarily driven by higher prices for services and a reduced decline in energy costs. A core figure, excluding volatile food and fuel prices, remained steady at 2.3%.
Despite this uptick, the European Central Bank (ECB) is unlikely to be overly concerned, as broader economic trends suggest a temporary blip. ECB President Christine Lagarde indicated that risks to inflation appear contained and the current policy rates are well-positioned to respond to any shifts. The ECB spent the past four years battling excessive inflation. Some policymakers may use the September figures as a reason to hold rates steady. Financial investors currently anticipate a low probability of further rate cuts in the near term.
However, some ECB policymakers are concerned about the possibility of inflation falling too low. The bank projects a dip to 1.7% next year, remaining below the target for six consecutive quarters. This prolonged period could potentially alter pricing and wage-setting behaviours. Weaker figures in industry, investment, and household consumption also point to a potential economic slowdown, compounded by U.S. tariffs.
The more hawkish members of the ECB argue that the risk of undershooting the inflation target is limited. They cite the economy’s resilience to trade tensions, a rebounding industry, solid employment figures, and increased defence spending as factors supporting growth. The ECB is expected to remain cautious and wait before adjusting rates again after cutting them by two percentage points in the year leading up to June.
