FRANKFURT, Germany (AP) — The inflation rate in Europe dropped to 2.9% in October, its lowest level in over two years. This decrease was attributed to falling fuel prices and rapid interest rate hikes by the European Central Bank. However, this positive news was offset by a 0.1% contraction in economic output in the eurozone countries during the July-September quarter.
The decline in inflation from 4.3% in September was driven by an 11.1% decrease in fuel prices and a slowdown in food inflation, which fell to 7.5%.
The decrease in inflation to under 3% brings it closer to the European Central Bank’s target of 2%. This is a significant improvement from the peak inflation rate of over 10% in October 2022 and marks the lowest reading since July 2021. However, economic growth has stalled, with output shrinking after months of near-zero growth.
Germany, the largest economy in the eurozone, saw a 0.1% decline in economic output, while France, the second-largest economy, only managed to achieve 0.1% growth, down from 0.6% in the previous quarter.
Economist Rory Fennessy suggests that a statistical quirk involving Ireland may have pushed Europe into negative territory. Ireland experienced a 1.8% drop in GDP, largely influenced by the finances of multinational companies based there.
Economic momentum is expected to remain weak in the coming months and will only recover when wages catch up with inflation. This has led to predictions of a period of economic stagnation in the eurozone.
The decrease in inflation can be attributed to a series of rapid interest rate hikes by the European Central Bank. Higher central bank rates are typically used to combat high inflation, as they raise borrowing costs and reduce demand for goods.
However, high interest rates can also slow economic growth. In recent months, credit-sensitive sectors such as construction have been negatively affected. Lingering inflation has also impacted consumer spending, as individuals must allocate more money for necessities like food and utilities.
The future path of inflation towards the European Central Bank’s target remains uncertain. Core inflation, which excludes volatile fuel and food prices, remains higher than the headline figure at 4.2%. Additionally, other indicators of future inflation, such as expectations for selling prices, have seen a significant decline.
The current surge in inflation began as the global economy rebounded from the COVID-19 pandemic, resulting in shortages of parts and raw materials. The situation was exacerbated by Russia’s invasion of Ukraine, which led to soaring energy prices as Moscow cut off most natural gas supplies to Europe.
Europe’s sluggish economy stands in contrast to the robust growth of 4.9% in the same quarter in the United States. The US economy was boosted by consumer spending and businesses rebuilding inventories, despite a similar series of rapid rate increases by the Federal Reserve.