(Bloomberg) — Inflation in France and Spain plunged below 2% — fueling bets that the European Central Bank will speed up the pace of interest-rate cuts.
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Data Friday showed consumer prices in France rose 1.5% from a year ago in September — sinking below 2% for the first time in more than three years mainly due to falls in energy costs. Spain saw a similar trend, with inflation easing to 1.7% on fuel, power and food.
Analysts had expected readings of 1.9% for each country. A separate ECB survey published later Friday showed consumers expect prices to rise more slowly over the coming years.
Cooling inflation across the 20-nation bloc has allowed the ECB to lower its deposit rate twice this year, with most policymakers indicating that a gradual path down has begun. A surprise contraction in the private-sector economy, however, has boosted wagers that monetary loosening will soon be accelerated.
There were further signs of weakness Friday in Germany, where unemployment rose more than anticipated this month — signaling that another economic rough patch is having an increasing impact on the labor market.
After this morning’s data, markets boosted bets on another quarter-point rate cut on Oct. 17, now pricing about an 80% chance of such a scenario.
The ECB has warned, however, that price gains in the region will probably pick up again later this year, with the retreat back to target unlikely to be fully complete until late 2025.
Officials will get a clearer picture of the situation over the coming days. Italy and Germany are set to publish data for this month on Monday, and the euro zone will do so itself on Tuesday.
For the ECB, however, headline inflation numbers have been taking a back seat to readings of price pressures in the services sector, which exceeded 4% in August and are frequently cited by hawks as grounds for prudence when cutting rates.
France’s September data also showed a moderation in services, where inflation eased to 2.5% from 3%.
What Bloomberg Economics Says…
“French headline inflation plunged in September, with lower energy contributions proving a significant factor alongside a big drop in services inflation. Annual inflation is now firmly below the ECB’s 2% target — and we expect the downshift to become more pronounced in early 2025. For the ECB, the downside surprise in services inflation is the key risk that could tip the balance toward an October cut.”
—Jamie Rush, Eleonora Mavroeidi, economists. Click here for full REACT
Bank of France Governor Francois Villeroy de Galhau has said the ECB should take a gradual approach to easing policy, being as careful not to undershoot as to overshoot the 2% target. The national central bank predicts inflation in France will slow sooner than in the euro area, reaching 1.5% in on average in 2025 after 2.5% this year
–With assistance from Joel Rinneby, Barbara Sladkowska, Rodrigo Orihuela, Aline Oyamada, Mark Evans and James Hirai.
(Updates with ECB survey in third paragraph, German unemployment in fifth.)
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