The inflation that has been wearing on European consumers fell sharply to 2.9% in October, its lowest in more than two years as fuel prices fell and rapid interest rate hikes from the European Central Bank took hold.

But that encouraging news was balanced by official figures showing economic output in the 20 countries that use the euro shrank by 0.1% in the July-September quarter.

Inflation fell from an annual 4.3% in September as fuel prices fell by 11.1% and painful food inflation slowed, to 7.5%.

The drop to under 3% is down from the peak of over 10% in October 2022 and puts the inflation figure at least within shouting distance of the European Central Bank’s target of 2% considered best for the economy.

But growth disappeared as output shrank after months of stagnation near zero.

Germany, the largest of the 20 countries that use the euro, saw its economy output fall by 0.1%, while No. 2 economy France only scraped out 0.1% growth, slowing from 0.6% in the previous quarter.

The lower inflation figure follows a rapid series of interest rate hikes by the European Central Bank. Higher central bank rates are the typical medicine against inflation that’s too high. They influence borrowing costs throughout the economy, raising the cost of credit for purchases such as homes or for expanding factories or offices. That reduces the demand for goods and thus restrains price increases.

But high rates can also slow growth. In recent months they have slammed credit-sensitive sectors like construction of new houses and business facilities. Meanwhile lingering inflation has still been high enough to hold back spending by consumers who had to set more money aside for necessaries like food and utility bills.

This burst of inflation was set off as the global economy rebounded from the COVID-19 pandemic, leading to shortages of parts and raw materials. It got worse when Russian invaded Ukraine, sending energy prices soaring as Moscow cut off most natural gas to Europe.
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