Inflation plummeted to a three-year low. Was the ECB's interest rate cut steady in September?

Eurozone inflation fell to its lowest level in three years this month, providing more reason for the ECB to cut interest rates again in September, even if its price growth is likely to rebound by the end of the year.

Data on Friday showed that the reduction in energy costs drove the overall CPI of the 20 countries in the Eurozone to slow from 2.6% to 2.2% in August, in line with expectations and getting closer to the ECB's 2% target.

However, as service inflation accelerates, some ECB policymakers may be concerned about wage growth in the sector.

The core CPI, which excludes volatile food and energy costs, also fell to 2.8% from 2.9% last month, in line with expectations, as lower imported commodity prices offset the increase in service sector inflation from 4% to 4.2% last month.

Service inflation is likely to be boosted by the Paris Olympics as the cost of services in France soared sharply. Some economists say this will be a one-time, temporary impact.

People generally expect the ECB to cut interest rates on September 12, but the real debate is whether the ECB will adopt more easing measures in October, given slowing price pressure, economic growth, and weak labor markets.

Although Friday's data will be welcomed by ECB policymakers, price growth may not return to target levels on a more sustainable basis until the end of 2025.

The base effect of rising energy prices a year ago depressed the inflation rate in August and September. Policymakers expect inflation to take a U-shaped curve and rebound to around 2.5% by the end of the year.

One issue worth paying attention to is that economists believe that the Eurozone's economic decline is greater than the ECB staff's predictions, which may cause interest rate expectations in the region to fluctuate in order to avoid worsening economic prospects.

Currently, the market believes that the ECB will cut interest rates about six times before the end of next year, about one more time than the ECB's own economic forecast. This shows that the market is more optimistic about inflation prospects than the ECB.

Rapid wage growth is probably still a top concern for ECB policymakers, especially given that service sector inflation is particularly sensitive to wages. The service sector, on the other hand, is the largest single item in the consumer price basket.