Euro Zone Inflation Plummets to Lowest in Three Years

Euro zone inflation has dropped to its lowest level in three years, hitting 2.2% this month. Lower energy costs contributed to this decline, aligning with European Central Bank's (ECB) targets. However, the ECB still faces concerns due to ongoing rapid wage growth, especially in the services sector.

Euro zone inflation has plunged to its lowest level in three years this month, strengthening the case for another European Central Bank (ECB) interest rate cut in September. Despite expectations of a rebound in price growth by year-end, inflation in the 20 euro-sharing countries fell to 2.2% from 2.6%, driven by lower energy costs.

However, core inflation figures, excluding volatile food and energy costs, showed a more nuanced outlook. Core inflation eased to 2.8% from 2.9%, while services inflation rose to 4.2% from 4.0%, driven partly by the Olympic Games in Paris. This dynamic keeps some ECB policymakers worried about wage growth in the services sector.

Economists expect the ECB to cut interest rates on Sept. 12 and possibly follow up with more easing in October amid moderating price pressures and slower economic growth. Nevertheless, rapid wage growth remains a top concern, especially in Germany, where unions are demanding significant pay increases to offset real incomes lost to high inflation.

(With inputs from agencies.)