Eurozone inflation hits central bank’s target for first time in over three years

Consumer prices increased by 1.8% on year in September across the 20 nations that make up the eurozone, falling from a month earlier and marking the first time since June 2021 that annual inflation has stood below the ECB’s 2% target.

September’s figures suggest policymakers can begin to claim victory in their the two-and-a-half-year battle to tame sky-high inflation that spiked with Russia’s full-scale invasion of Ukraine early in 2022. The resultant energy shock drove consumer prices rapidly higher across Europe and much of the rest of the globe.

Soaring inflation, exacerbated by supply squeezes and further geopolitical turbulence, forced central banks into a cycle of tighter monetary policy that took interest rates in many parts of the wealthy world to their highest level since the beginning of the century.

Rate setters have now begun the process of lowering borrowing costs in order to ease some of the burden on investment and consumer spending, with the U.S. Federal Reserve last month joining peers such as the European Central Bank, the Bank of England and the Swiss National Bank in cutting its key rate for the first time in years.

Inflation could rise again in the year’s final months as base effects in energy lessen, ECB President Christine Lagarde said Monday. But the rate should subsequently return to target promptly, a trend that the central bank will take into account at its coming policy meeting, Lagarde told European lawmakers in Brussels. She also noted that economic recovery in the eurozone faces significant pressures.

Sliding inflation makes it increasingly likely the central bank to lower its own inflation forecasts and cut interest rates more quickly, economists at Deutsche Bank said in a note. In some eurozone members, inflation was even lower, hitting just above 0% in Ireland and coming below 1% in Italy, Finland, Lithuania, Luxembourg and Slovenia.

In France, Italy and Spain, three of the union’s major economies, the end of the summer tourism season—including the Olympic Games held in Paris—helped cool services prices, a key focus for ECB policymakers concerned about a fresh spike in inflation. In Germany, the currency union’s most important economy, lower inflation had more to do with a cool-off in energy prices, though services inflation also eased a little.

September’s gentler price rises, alongside recent signs of weakness in the eurozone economy, offer support for those ECB rate setters in favour of cutting interest rates for a second-straight meeting later this month, Pantheon Macroeconomics’ Claus Vistesen and Melanie Debono wrote in a note to clients.

“The [ECB governing] council will be sitting down [this] month with risks to both inflation and growth firmly tilted to the downside," they said.

Weaker inflation in Europe comes amid sputtering growth in the 20-member eurozone, with some economists suggesting that economic activity might now become the main area of concern for policymakers. Business surveys earlier Tuesday suggested activity in Europe’s manufacturing sector remains hobbled by high rates and sluggish demand, while the summer’s services boom has faded rapidly.

“Demand remains a chokehold on the [manufacturing] sector," Pantheon’s Debono said.

Germany in particular is facing a growing risk of recession after the economy unexpectedly contracted in the year’s second quarter, as a beleaguered factory sector continues to struggle to get back on its feet following the blow from the Russia-Ukraine crisis. In the latest sign that a faltering economy could hit the jobs market, auto supplier Bertrandt said Monday that it will cut up to 1,200 positions in Germany in the face of weak demand, trade snarls and hotter competition from outside Europe.

Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby