Europe saw inflation drop to 4.3 per cent in August, its lowest level in two years.

Inflation that has plagued Europeans declined sharply in September to the lowest level in two years, strengthening hopes consumers will get relief from costlier groceries, vacations and haircuts — and that the European Central Bank won’t have to further restrict the economy by raising interest rates from already-record highs.

The annual rate was 4.3 per cent this month, a drop from 5.2 per cent in August, and the lowest since October 2021, the European Union’s statistics agency, Eurostat, said Friday. But recently higher oil prices are casting a shadow over prospects for quickly beating inflation down to the central bank’s target of two per cent.

Core inflation, which excludes volatile fuel and food prices, fell more than analysts expected — to 4.5 per cent from 5.3 per cent. The ECB closely watches this figure to assess how inflation is coming down.

The fall in core inflation “reinforces our view that the ECB has finished raising interest rates,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. He predicted the overall inflation rate would tumble to 3.5 per cent by the end of the year.

While inflation is lower in the U.S., a measure closely tracked by the Federal Reserve accelerated in August to 3.5 per cent compared with a year earlier, from 3.4 per cent in July, boosted mainly by higher gasoline prices.

Meanwhile, eurozone energy prices dropped 4.7 per cent in September, while food price inflation remained uncomfortably high at 8.8 per cent.

Readings across the major economies that use the euro currency were a mixed bag. Germany’s annual inflation fell to 4.3 per cent in September from 6.4 per cent a month earlier, while Spain’s increased to 3.2 per cent from 2.4 per cent.

ECB president Christine Lagarde said if interest rate levels are maintained for a “sufficiently long duration,” that would make a substantial contribution to returning inflation to two per cent, a goal the bank does not expect to reach until 2025.

The ECB has been trying to get a handle on inflation by raising interest rates, which make it more expensive to borrow for big purchases such as houses or new factory equipment to expand a business. That reduces demand for goods and, in turn, inflation.

But higher rates also can weigh on economic growth, leaving the central bank facing a balancing act over how far to go.

Many economists think the ECB has finished raising rates unless something drastic happens to keep inflation from falling further. That could be a further increase in oil prices, which have risen recently after major producers Saudi Arabia and Russia extended production cuts.