Falling inflation increases scope for monetary easing

The fall in euro-zone CPI inflation to 1.1% in September – its lowest rate since February 2010 – leaves it well below the ECB’s target of “below, but close to, 2%”. While falling energy inflation has played an important role, core inflation has also declined and, at 1.0%, is only a touch above its record low of 0.8%. With producers apparently absorbing the recent pick-up in input costs and wage growth set to remain weak, we see headline inflation falling further, meaning that the ECB may eventually opt to loosen monetary policy further.