Inflation drops sharply in Europe. It offers a glimmer of hope, but higher oil prices loom

FRANKFURT, Germany -- Inflation that has been plaguing Europeans made a marked decline in September, strengthening hopes that consumers will eventually get relief from costlier groceries, vacations and haircuts — and that the European Central Bank won’t have to further restrict the economy by raising interest rates from already-record highs.The annual rate was 4.3% this month, a drop from 5.2% in August. But recently higher oil prices are casting a shadow over prospects for beating inflation back down to the central bank’s target of 2%. sending energy prices soaring as Moscow cut off most natural gas to Europe.

Core inflation, which excludes volatile fuel and food prices, also fell — to 4.5% from 5.3%, according to the figures released Friday by the European Union statistics agency, Eurostat. The core figure is closely watched by the ECB in assessing how inflation is coming down.Readings across the major economies that use the euro currency were a mixed bag. Germany's annual inflation fell to 4.3% in September from 6.4% a month earlier, while Spain's increased to 3.2% from 2.4%.This burst of inflation was set off as the global economy rebounded from the COVID-19 pandemic, leading to shortages of parts and raw materials. 

Economists warn, however, that the large drop in Germany, the 20-country eurozone’s largest economy, was exaggerated by a statistical quirk — the end of a subsidized transportation ticket and a fuel subsidy in September 2022 that had raised consumer prices that month.The latest inflation figures follow what could have been a final interest rate increase by the ECB in its swift series of hikes. It brought its benchmark deposit rate to a record high of 4% this month, up from minus 0.5% in July 2022.Supply chain bottlenecks and energy prices have eased, but inflation has worked its way through the economy.

ECB President Christine Lagarde said that if interest rate levels are maintained for a "sufficiently long duration,” that would make a substantial contribution to returning inflation to 2%, a goal the bank does not expect to reach until 2025.High prices have been holding back the European economy because people's paychecks don’t go as far as they used to in covering their bills, forcing them to cut back on other spending.Economic growth has stagnated to just above zero in the first six months of the year, with some indicators pointing to a downturn in the current July-to-September quarter.

The fall in core inflation “reinforces our view that the ECB has finished raising interest rates,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. He predicted that the overall inflation rate would tumble to 3.5% by the end of the year.Meanwhile, eurozone energy prices dropped 4.7% in September, while food price inflation remained uncomfortably high at 8.8%.It got worse when Russian invaded Ukraine, sending energy prices soaring as Moscow cut off most natural gas to Europe.