Chart of the Month : the importance of services (dis)inflation
Since June 2023, US inflation, as measured by the year-on-year change of the BLS’s CPI, has stopped declining: it was 3% in June 2023, and it was still 3.2% in February 2024. Over the same period, disinflation was more pronounced in the euro area (HICP inflation fell from +5.5% y/y in June 2023 to +2.6% in February 2024 according to Eurostat’s flash estimate), but since the end of 2023 it has also tended to come to a halt. The fact that energy deflation plays less negatively explains this slowdown in disinflation. Food and core inflation kept falling but core disinflation remains really slow. Core inflation was still 3.8% in February 2024 in the United States and 3.1% in the euro area.
This slow pace is due to services disinflation, which, as our chart shows, remains limited. The first salient point is, in both the US and the Eurozone, the higher level of services inflation over goods inflation – and over its historical trend. It should also be noted that this gap opened earlier and is much larger in the United States than in the euro area. The third focus is on higher services inflation in the US than in the Eurozone, while goods inflation is much lower (and even negative, i.e. deflation).
From this perspective, the disinflation process appears to be more advanced in the euro area than in the US. We expect inflation to return to the 2% target faster in the Eurozone (in 2024) than in the US (in 2025). However, wage dynamics are one of the determinants to monitor[1]. The good news is that wages have started to decelerate, but this moderation remains modest. And, in the coming quarters, the risk, in our view, is that it remains gradual rather than gathering speed.
The fall in services inflation should therefore remain contained too, fueling the issue of how hard the last mile of disinflation could be. Amatyakul, Igan, and Lombardi (2024) highlight this more important role played, now, by rising services prices, when inflation dynamics had previously been more influenced by goods prices. They also explain how the relative stickiness of these services prices could imply slower disinflation[2]. Galeone and Gros (2023) have another perspective on this last mile. On the contrary, their analysis suggests that it should not represent particular difficulties, as inflation has moved from its regime of “high pass-through of energy price shocks” back to the ”stable state”[3]. The debate remains open.
