With the exception of Japan, core inflation is falling in most advanced economies. The decline is quite widespread (food, clothing or household and equipment goods). This dynamic underpins our forecasts that no further rate hikes are expected from the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). That said, in the United Kingdom, there is still no unanimity among MPC members on maintaining interest rates and a surprise coming from across the Channel should not be ruled out.
The decline in inflation was particularly marked in the Eurozone in October (from 4.3% year-on-year in September to 2.9%), and especially in Italy (from 5.6% to 1.9%). The output price index in the Eurozone (excluding construction), which is largely influenced by fluctuations in energy prices, fell more sharply in August (-11.5% y/y). That said, the negative contribution of the “Energy” component is likely to recede significantly before returning to positive levels, on the back of the recent rise in oil and gas prices. Consumer prices in Belgium and the Netherlands were in deflation in October, while inflation rose in three countries: Spain, Greece and Estonia.
In the United States, wages are slowing and rising closer to inflation. However, the latter picked up again this summer, fuelled by the rebound in energy prices: after falling to 3.0% y/y in June, the total CPI measure rose to 3.6% y/y in September (3.4% y/y for the PCE deflator). Core measure fell by 0.2 percentage points to 4.1% y/y. With regards to the dynamics in services, it is more important than ever to separate the development of the housing component– slightly down but still up by 7.2% y/y –. from the other categories. Taken as a whole, the remaining services recorded a sharper slowdown to 2.7% y/y, the lowest rate in two and a half years.
In the United Kingdom, the fall in inflation stalled in September to 6.7% a/a. In the short term, the room for a deceleration appears to be less important than that of its European neighbours and that of the United States, notably due to stronger wage growth. Moreover, the last BoE meeting, held on 2 November, resulted again in a split vote: three of the nine members that make up the MPC voted, as in the previous month, in favour of a 25 basis point increase in key rates. That said, the labour market is deteriorating: unemployment is picking up and will dampen inflationary pressures on wages and consumer prices.
In Japan, the breakeven inflation rate/ breakeven point in inflation ??? has continued to rise in recent weeks, and even more so after the Bank of Japan (BoJ) meeting on 31 October, which resulted in a relaxation of the conditions for the BoJ’s intervention in the 10-year JGB. Headline inflation fell slightly in September, from 3.1% y/y to 3.0% y/y, but the annual increase in services prices remained stable at 2%. In addition, two of the three alternative measures scrutinised by the BoJ – the trimmed mean and the weighted median – continue to rise.
Chart of the month: Towards a higher-inflation regime in Japan?
In Japan, the adjustment of markets to higher inflation close to the 2% target continues. The breakeven rate has continued to rise in recent weeks. The gap narrows with the United States and those of the four major Euro area countries, which have stabilised at around 3% and 2% respectively. At 3.0% y/y in September, and following a jaws effect, inflation in Japan caught up with the level recorded in the Eurozone (2.9%) and was close to the US one (3.7%). Underlying factors pushing inflation towards the 2% target remain fragile though, with contractual wage growth still low in the country (+1.4% y/y in September according to the Ministry of Labour data). Nevertheless, at 2% in September inflation in services has returned to levels not seen since the 1990s.
The convergence of market inflation expectations also reflects the significant monetary policy divergence between, on the one hand, a US Federal Reserve that has completed its rate hike phase, and, on the other, the Bank of Japan, which is still at an early stage. The Japanese central bank is -very gradually- withdrawing from its yield curve control policy, before a more marked normalisation expected in 2024.
