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Euro zone inflation drops to two-year low in October; economy shrinks in third quarter

People look at the banking district skyline with the Commerzbank building (2ndR) during sunset in Frankfurt am Main, western Germany, on September 25, 2023. (Photo by Kirill KUDRYAVTSEV / AFP) (Photo by KIRILL KUDRYAVTSEV/AFP via Getty Images)

Kirill Kudryavtsev | Afp | Getty Images

Inflation across the euro zone dropped to a two-year low of 2.9% in October, according to preliminary data released Tuesday, down from 4.3% the previous month and below a consensus estimate of 3.1% from a Reuters poll of economists.

Core inflation — which excludes volatile food and energy prices — dropped to 4.2% year-on-year in October from 4.5% in September.

European Union statistics agency Eurostat also revealed that the euro zone economy contracted by 0.1% in the third quarter, according to flash estimates, below consensus estimates for GDP to be unchanged from the previous quarter.

The 20-country common currency bloc has been grappling with high inflation for the past 18 months, with the consumer price index peaking at 10.6% in October 2022.

The European Central Bank responded with a run of 10 consecutive interest rate hikes that took its key rate to a record high of 4%, before opting to pause last week despite upside risks to energy costs as a result of the unfolding Israel-Hamas war.

The ECB expects the euro zone economy to grow by just 0.7% this year, by 1% in 2024 and 1.5% in 2025.

Europe’s largest economy, Germany, recorded a 0.1% quarterly fall in GDP for the third quarter, slightly better than the 0.3% decline forecast in a Reuters poll of economists. The economy shrank 0.8% on a price-adjusted basis from the same period last year.

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