A significant drop in inflation in the eurozone. According to the preliminary reading in September, the Consumer Price Index (CPI) inflation in the eurozone fell year-on-year to 4.3% compared to 5.2% in the previous month. The core indicator followed a similar trend, falling to 4.5% against 5.3%. The readings turned out much lower than expected by market consensus, respectively by 0.2% and 0.3%.
This month, the reading from Germany, where the CPI inflation was 4.5% y/y, compared to 6.1% a month earlier, had a significant influence on the decrease of the indicator. However, we notice contrasting directions in the CPI data from different economies of the eurozone. In Spain, where the inflation target was reached a few months ago, there is now a reversal of the trend due to rising energy and fuel prices – inflation in this country is rising again. In contrast, inflation in France remained at a level of 4.9%.
However, this does not change the fact that overall inflation in the eurozone remains high and there is still a bit to go to reach the target. The European Central Bank (ECB) will certainly base its decisions on inflation indicators. Given such inflation data, it would seem that the September hike was the last in the cycle, and the ECB will now go into waiting mode. Despite the surprise drop in inflation, discussions about swift reductions are still premature. With its actions, the ECB signaled that fighting inflation comes first, even at the expense of recession, and rates will remain high for as long as necessary. It seems that this necessity still retains its power.
Author: Bartosz Wałecki, Analyst from Michael / Ström Dom Maklerski
