Eurozone inflation has dropped to its lowest level in almost two years, while US price increases in the past month were lower than expected. This development has raised speculation that interest rate hikes in both the Eurozone and the US may be coming to an end. The news has brought stability to bond markets after a month of volatility. Eurozone consumer prices rose by 4.3%, which is below economists’ forecasts of 4.5% and lower than August’s rate of 5.2%. In the US, the core personal consumption expenditure index, the Federal Reserve’s preferred measure of prices, only rose by 0.1% in August.
Seema Shah, Chief Global Strategist at Principal Asset Management, stated that “the tightening cycle is coming to an end,” alluding to the series of interest rate increases by central banks over the past two years. Despite this positive news, bond yields are still close to their highest levels in over a decade. The US data demonstrated consistent improvement in core inflation, which excludes energy and food, reinforcing expectations that the European Central Bank (ECB) will conclude its streak of 10 consecutive interest rate increases next month.
The slowdown in Eurozone inflation has added to the belief that the ECB will not raise interest rates further. Although inflation levels in the Eurozone have decreased from last year’s peak of 10.6%, they still remain higher than in the UK, where inflation reached 6.7% in the previous month. The bond market reacted positively to these developments, with German and US 10-year Treasury yields declining. However, central banks maintain their stance that they may consider raising interest rates again if inflationary pressures resurge.