LONDON, Nov 26 Reuters A key gauge of the market39;s longterm euro zone inflation expectations fell below 2 for the first time since July 2022 on Tuesday, a sign investors think faltering growth means inflation could undershoot the European Central Bank39;s target.

The fiveyear, fiveyear forward inflation swap fell to 1.9994, LSEG data showed, a relatively sharp fall from above 2.2 in October.

The swap reflects investors39; expectations for inflation for the fiveyear period that begins in five years39; time.

WHY IS IT IMPORTANT

Central bankers are highly attuned to the inflation expectations of investors, households and companies. Many economists believe inflation expectations can become a selffulfilling prophecy, as consumers increase spending now to avoid higher prices in the future, or vice versa.

Former ECB President Mario Draghi in 2014 cited a fiveyearfiveyear inflation swap, which was then just below 2, as a worrying sign for the central bank. In the years before 2022, the ECB saw deflation as a major risk.

And the latest fall will likely cement expectations for ECB rate cuts.

CONTEXT

Euro zone inflation has fallen from a record high of 10.6 in October 2022 to 1.7 in September this year, before rising to 2 in October. November numbers are released on Friday.

Analysts say a normalisation of snarledup supply chains after COVID, a fall in energy prices after the Ukraine war, and central bank rate hikes have helped cool price growth.

Survey data on Friday…