Overview: Labour shortages persist pushing US wage inflation to the highest level in 10 years. Commodity prices eased over the past month, though, as gas, oil and coal prices are off the peaks. Bottlenecks continue to drive unusually long delivery times. Freight rates have stabilized at very high levels. We look for US core inflation to rise further and peaking somewhat above 5% in February 2022 before easing to around 2½% by end-2022. In the euro we expect core inflation to peak now.
Inflation expectations: Market-based inflation expectations have moved to new cycle highs in both US and Europe over the past month (although it has declined from the peak over the past week). Survey-based inflation expectations are also on the rise in both US and euro area (especially short-term expectations).
US: CPI inflation was once again higher than anticipated in October, now running at 6.2% y/y, the highest rate since December 1990. Price increases are becoming more broad-based and not only driven by surging energy and food prices. Survey-based short-term inflation expectations remain very high but long-term measures remain well-anchored for now. 10yr breakeven inflation expectations are once again above the 2004-07 average. Wage growth is increasing, most likely reflecting shortage of labour (not least within “leisure and hospitality” where wage growth is above 11% y/y).
Euro: HICP inflation rose to 4.1% in October, a new all-time high. Energy continues to be the main driver accounting for 2.3pp of the increase, due to higher natural gas and electricity prices. Although natural gas prices have declined some 40% from the peak, elevated energy price inflation is likely to stay with us in the coming months. As we enter 2022 and some of the inflation distortions will fade, it will be important to keep a close eye on wage developments, not least the big German bargaining rounds, see Research Euro Area – German wages: what to watch in 2022, 25 October.
China: Chinese PPI inflation rose to 10.7% in September, the highest rate in more than 25 years. CPI inflation is still well behaved at 0.7%.
