A woman takes a selfie photo with the Eiffel Tower in the background on Rue Surcouf in Paris on July 23, 2024, ahead of the Paris 2024 Olympic Games.
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As preliminary figures from the statistics office Eurostat showed on Friday, inflation in the euro zone fell to a three-year low of 2.2 percent in August, increasing expectations of an interest rate cut by the European Central Bank in September.
The decline of 2.6 percent in July was in line with the forecast of economists surveyed by Reuters.
The core rate – excluding the more volatile components of energy, food, alcohol and tobacco – fell from 2.9 percent in July to 2.8 percent in August, also in line with a Reuters poll.
The euro slipped further against the pound following the release, trading 0.1 percent lower at 0.8408 pounds. Against the US dollar, the euro rose 0.04 percent to $1.1083 as investors prepare for a Federal Reserve rate cut in September, the first step in monetary easing in the current cycle.
This came after price increases in Germany, the eurozone's largest economy, cooled more than expected on a harmonized eurozone basis, falling to two percent over the course of the month.
ING economists expect core inflation in the eurozone to remain stubbornly above 2.5 percent for the rest of the year due to sluggish developments in goods and services.
Markets have already priced in another 25 basis point rate cut by the ECB in September, after the bank made its first rate cut in June, and a further 25 basis point cut is expected by the end of the year.
Kyle Chapman, foreign exchange market analyst at the Ballinger Group, said the press release nevertheless contained details that would cause concern for ECB policymakers, particularly services sector inflation of 4.2 percent.
“The positive headlines are based solely on the impact of energy prices and obscure the fact that little real progress has been made on the underlying pressures,” Chapman said in a note.
“Services sector inflation has reached its highest level since last October, has been stuck at the four percent mark for almost a year now and has been moving in the wrong direction since the spring.”
Ahead of the release of the latest data, Ed Smith, co-chief investment officer at Rathbones Asset Management, told CNBC's “Squawk Box Europe” on Friday that the central bank was on track for further rate cuts, citing ECB President Christine Lagarde's focus on wage inflation.
“Negotiated wages are a big issue in the Eurozone, [they] make up about 80% of the workforce [who] have negotiated wage increases for themselves. Sharp declines in negotiated wages across the eurozone in the second quarter, declines in other indicators such as Indeed.com listings… the ECB's telephone survey of companies… also point to a declining wage intention.”
“But there is a certain stickiness, the latest [purchasing managers’ index] Numbers, surveys in the services sector showed some rigidity in the price components of it,” he added, noting that this would make some voting members of the ECB cautious.
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