Eurozone Inflation Falls Under 2% For First Time Since 2021

The eurozone's annual inflation rate fell to its lowest level in three-and-a-half years in September, official data showed Tuesday, dropping below the European Central Bank's two-percent target and fuelling expectations of a rate cut.

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

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

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 percent in September from 2.8 percent in August, the EU's official statistics agency said.

The central bank's chief Christine Lagarde said Monday 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 Tuesday's data will raise hopes for another reduction at the next meeting on October 17.

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.

Consumer price rises have significantly slowed since the 10.6 percent peak in October 2022 after energy costs soared following Russia's invasion of Ukraine that year.

Sky-high inflation pushed the ECB to aggressively raise rates but with inflation now below target, the bank's "concerns seem to be shifting towards the lacklustre growth environment", said ING bank's Bert Colijn.

The ECB said last month it expects expansion of just 0.8 percent this year, a figure revised down from a previous prediction of 0.9 percent published in June.

The slowdown in inflation comes after energy prices fell sharply by 6.0 percent in September, compared with a drop of 3.0 percent in August, Eurostat data showed.

Lagarde warned "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 Monday that "the latest developments strengthen our confidence that inflation will return to target in a timely manner".

Tuesday's data showed services inflation, which had been accelerating in recent months, slowed to 4.0 percent in September, down from 4.1 percent in August.

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

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

Ireland registered the lowest inflation rate in September across the eurozone, at 0.2 percent, the data showed.