Overview: Inflation pressures from oil, metals, food and freight rates have come down but labour markets remain tight in US and Europe keeping wage pressures high. Incoming inflation numbers also remain elevated as evident from the upward surprise in US CPI for August (see below). Gas and electricity prices have come off the highs in Europe but remain very high. Looking forward, we expect inflation to stay high in the short term (rise further in the euro area) but decline during 2023 as recession looms.
Inflation expectations: US household 3-year inflation expectations from NY Fed turned lower in August. Euro consumer price expectations are off the peak but still high. Market-based long-term inflation expectations are moving broadly sideways above 2%.
US: CPI inflation surprised to the upside in August, as core inflation remained brisk at +0.6% m/m. Declining gasoline prices will continue to ease energy and transportation related inflation, weighing on headline CPI towards year-end. Most leading indicators point towards moderating inflation expectations, as supply chain challenges ease and commodity prices have declined. In addition, while shelter prices contribute positively to the CPI for now, housing market conditions have continued to cool. That said, the strong economic momentum and persistent labour shortages continue to push wages higher, creating sticky and broad-based upward pressure on consumer prices as well.
Euro: In contrast to the US, an inflation peak remains not yet in sight, with headline inflation reaching an all-time high of 9.1% in August. Food prices remain on a steep uptrend and although energy price inflation moderated slightly, we think it is the ‘calm before the storm’, with significant increases for gas and electricity prices still looming in coming months. Weaker demand does not yet seem to be an issue for firms’ pricing decisions, as both goods and services inflation accelerated further. Inflation expectations ticked up with the latest energy price surge, leaving ECB to highlight the risk of de-anchoring. Despite the tight labour market, a sharp rise in wages is not yet in sight, with negotiated wage edging down to 2.4% in Q2 22 (from 3.0% in Q1).
China: CPI moved down to 2.5% y/y in August from 2.7% in July. PPI inflation fell yet again to 2.3% y/y from 4.2% y/y. It’s down from the peak in Oct ’21 at 13.5% y/y.
