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Despite the rebound in the United States, inflation continues overall to slow in the G7 countries and in the euro area as a whole. In Japan, keeping consumer prices above 2% will remain complicated in the short term, due to the loss of momentum observed this winter: inflation rebounded in February due to base effects, but the 3m/3M annualised rate fell back to 1.3%. The decline in the 3m/3m annualised rate is more marked in services, down to only 0.4%. The wage increase granted following the annual wage negotiations (Shunto): 5.3% in total, including 3.7% in base salary, will nevertheless support the BoJ in its (very gradual) attempt to normalise monetary policy. The cash earnings data (page 27) have indicated an acceleration since the beginning of the year, which most certainly reflects the early outcome of the wage negotiations.

In the United States, the seasonally adjusted monthly increase in prices in services has gained momentum in recent months pushing the 3m/3m annualised rate to the highest level since November 2022, at 6.5%. Excluding shelter, services inflation jumped 0.8 percentage points in March to 4.8% y/y. The spectacular increase in the cost of motor vehicle insurances, unseen for more than 45 years, contributes in itself to 0.6 percentage points of inflation. However, shelter remains the main driver of inflation in the country, contributing for more than half (2.1 pp) to the total increase. Deflation on new and used cars helps limit the rise in headline inflation, albeit to a lesser extent for used vehicles compared to previous months.

On the other hand, inflation continues to decline in the euro area, with inflation expected to fall temporarily below 2% in the second quarter, in line with our forecast. The ECB will also take note of the general decline in alternative inflation measures (page 9), which are now close to or below 3%. On a year-on-year basis, the harmonised index of prices in the euro area fell by 0.2 points to 2.4% in March, according to Eurostat's preliminary estimate. A third of member States recorded inflation below 2% last month. The persistent deflation of producer prices, and in particular the index excluding construction and energy, is a further sign of the decline in price pressures. However, there have been some unfavourable developments: inflation in services has not fallen for five months.

In the UK, the CPI fell back below 4% y/y in March for the first time in two-and-a-half years, while core inflation fell 0.5 percentage points to 4.5%. However, there are still significant discrepancies between items in the consumer price index, which explains the very limited improvement in chart showing the degree of generalisation of inflation (page 13). Deflation on durable goods intensified (-1.7%), the one on energy fell slightly but remained high (-13.8%), while inflation in services was still slow to fall more significantly (+6.1%). The decline in the latter remains limited due to the strong dynamism of wages.

Chart of the Month : One point does not make a trend but how about three points?

In March 2024, US inflation (as measured by the CPI) surprised unfavourably for the third month in a row, with a higher-than-expected figure, this time on both the headline and the core measures. The rise in headline (year-on-year) inflation was somewhat larger than expected (+0.3 percentage points to 3.5%, thus returning to its highest level since last September) and core inflation remained stable (at 3.8%) against a slight expected decline.

Although Jerome Powell put the bad surprise of the January and February figures into perspective, inviting us to step back and look at the trend, this becomes more complicated with the March data because the slowdown, or even reversal, of the disinflation process is quite clear. If we take June 2023 as the reference point – headline inflation being then, at 3% y/y, at its lowest level for almost 2.5 years (March 2021) – core inflation lost only 1 percentage point in 9 months (from 4.8% to 3.8%) when it had lost nearly 2 pp in the previous 9 months (between September 2022 and June 2023). Headline inflation has risen by half a point since June 2023, after having lost 5 pp between September 2022 and June 2023: the decline in core and food inflation to a lesser extent in recent months has not been sufficient to offset the diminishing negative contribution of energy prices (which, moreover, became positive again in March).

When viewed in perspective, half a percentage point increase in headline inflation since June 2023 is not, at this stage, significant and does not fundamentally call into question the disinflation trajectory, especially since the slowdown of core disinflation can be attributed to a small number of components of the price index. Three items, excluding energy-related ones, stand out, with a contribution to inflation up between June 2023 and March 2024 (see exhibit 1): used cars (2% weight in the CPI), medical care services (6%) and motor vehicle insurance (3%). Since such a surge in the prices of the latter is unusual (+22.2% y/y in March 2024), it is conceivable that they will moderate in the future and that core inflation could resume falling a bit more rapidly.

This “last mile” of disinflation (from 3% to 2%) looks really uneasy to cover. This reinforces the possibility that the Fed may delay its first rate cut further. By contrast, on the Eurozone side, the ECB’s first cut in June tends to be confirmed, inflation here being lower and falling more (2.4% in March according to Eurostat’s flash estimate). At least in this respect, the Eurozone is doing better than the United States.