Inflation looks to have cooled further in August, removing one of the last remaining obstacles to an interest rate cut from the European Central Bank next month.

In Germany, the continent’s largest economy, inflation returned to target for the first time in over three years, and while a drop in volatile energy prices was the biggest factor, the underlying picture also improved. Elsewhere Thursday, Spain, Belgium and Ireland all reported similar slowdowns.

Germany’s statistics institute, Destatis, said prices rose at an annual rate of 2 percent in August, based on the methodology that’s shared by other EU countries. On a month-on-month basis, prices actually contracted by 0.2 percent. The data is preliminary and could be revised later.

Importantly, however, energy prices accounted for a large part of the fall. Stripping out more volatile elements, inflation remains above target. The cost of services, which has been the main reason for that overshoot all year, was still up 3.9 percent year-on-year in Germany, supported by strong rises in wages across the sector.

Franziska Palmas, senior Europe economist at Capital Economics, said that means that rates are only likely to come down slowly, but she still said the readings give the ECB enough room to cut rates in September.

ING’s global head of macroeconomics, Carsten Brzeski, called the results “great news for the ECB” and added that a slowing economy and cooling inflation make a  “perfect macro backdrop” for lower rates.  But even so, he too warned services inflation isn't dead yet.

“German unions are going into the post-summer bargaining rounds with high demands. It could take longer than the ECB expects before wage growth in the eurozone comes down significantly,” said Brzeski.

The ECB’s chief economist Philip Lane acknowledged at a conference in Frankfurt on Thursday that wage growth may accelerate again in the final part of 2024 before returning to a downward path next year.

In an interview with POLITICO conducted before the data, meanwhile, Bank of Finland Governor Olli Rehn said the ECB also needed to take account of growing risks to growth in the eurozone, especially from geopolitical issues.

Financial markets responded by pricing in more monetary easing: the euro fell 0.4 percent against the dollar to $1.1080, while the yields on German and French two-year government bonds, which are closely linked to expectations of ECB rates, fell to their lowest in three weeks.

While cutting interest rates can risk weakening the euro, that seems unlikely in the current environment: in the U.S., the Federal Reserve has all but confirmed it will lower its own benchmark rate next month in response to steadily rising unemployment.

(Additional reporting by Carlo Boffa and Johanna Treeck)