Eurozone Inflation Dipped By More Than Expected

Eurozone Inflation Dipped By More Than Expected
Stéphane Renevier, CFA

about 2 months ago2 mins

What’s going on here?

Eurozone inflation dipped by more than expected on Friday to land at a two-year low.

What does this mean?

Record scratch: inflation in the eurozone just fell from last month’s 5.2% to 4.3%, coming in lower than investors expected and skimming levels last seen in October 2021. That’s mainly because the cost of energy calmed down, but still, core inflation – which doesn’t count volatile energy and food costs – also chilled by more than expected. European inflation certainly seems to be on a comedown, but not all of the region got the memo: Germany’s prices relaxed by a lot, but inflation just rebounded to hit above 3% in Spain.

Eurozone inflation

Why should I care?

For markets: Time for a final summer break.

Investors are crossing their fingers that the latest data might encourage the European Central Bank (ECB) to call it quits on its long run of interest rate hikes when it meets later this month. That would take the heat off stocks and bonds in the region, which explains why European government bonds rallied and stock markets ticked up after the data came out.

EU inflation components

The bigger picture: Run for the Dolomites.

Let’s not get ahead of ourselves, though. Inflation’s headed in the right direction, but it’s still more than double the ECB’s 2% target. So despite renewed hopes for a pause in rate hikes, the central bank may need to stay firm. Investors might be hoping for the best, but they’re bracing for the worst: they expect a lengthy period of high borrowing costs, which make it harder for both businesses and everyday folks to get their hands on extra cash. Factor in that it’ll take a while for the full negative economic impact of those rate hikes to reveal itself, and the risk of rising oil prices sparking another inflation jolt, and you might want to keep an eye on the currents before you dive into the Mediterranean sea.



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