Euro zone inflation drops to lowest in over two years

Euro zone inflation dropped to its lowest level in over two years in October, as energy prices fell and the high interest rates set by the European Central Bank dampened demand, a preliminary reading showed on Tuesday.

The data seems likely to cement the market’s view that the ECB is done with raising rates as part of its fight against high inflation, which had been supported by more expensive fuel, supply disruptions and a recovery in demand following the COVID-19 pandemic.

Prices grew by 2.9 per cent year on year in October, the slowest pace since July 2021, from 4.3 per cent a month earlier, according to Eurostat’s flash estimate.

Inflation started falling sharply last month as the massive increase in energy prices recorded a year earlier impacted the annual comparison.

A measure of inflation that excludes energy, food, alcohol and tobacco also declined – to 4.2 per cent, the lowest level since July 2022, from 4.5 per cent. That measure is viewed by the ECB as a more accurate reflection of the underlying trend.

All components in the inflation basket recorded smaller increases than a month earlier, although the slowdown was minimal in services, at 4.6 per cent from 4.7 per cent, probably as a result of rising wages.

While inflation is still relatively far from the ECB’s 2 per cent target, Tuesday’s readings were likely to strengthen the central bank’s belief that it will slowly fall to its goal by 2025.