Disinflation remains limited
General inflation dynamics in the euro area remained mixed in March, according to Eurostat’s preliminary figures. Headline inflation slowed from 8.5% in February to 6.8%, with a marked deceleration in Spain (6.0% to 3.3% y/y), Luxembourg (4.8% to 3.0%) and the Netherlands (8.9% to 4.5%). This essentially reflects favourable base effects on the energy component. However, almost a third of euro area countries had an inflation rate still above 10%, the majority of which were in Eastern Europe.
Energy inflation continues to slow as a result of falling prices on world markets, the base effect on oil, and government measures to fix (or cap) tariffs. In the United States, this component contributed only 0.4 percentage points (p.p.) to headline inflation in February. It is slightly more in the eurozone (1.4 p.p.) – Spain, Greece, the Netherlands and Belgium have a negative figure. In the United Kingdom, the increase is still significant, contributing 3.3 p.p. to national inflation.
Nevertheless, underlying pressures are still rising in the euro area, and some alternative measures scrutinised by the ECB – the weighted median and the super-core HICP – reached a new high (7.8% and 6.3% respectively in February). In the United States, core inflation slowed slightly in February. However, should the pace of month-on-month increase continue, it will remain in line with an annual inflation rate above 3%. UK inflation (headline and core) picked up slightly in March.
In addition, the increase in the shelter component (actual and imputed rents) is increasingly fueling inflation. Particularly, in the United States, rent inflation reached 8.2% y/y in February (CPI measure), the fastest pace since the current statistics began (1990). These figures also rose in the United Kingdom (+4.7% y/y) and to a lesser extent in the eurozone (+2.3%). Together with food, housing is the largest item of household expenditure.
Although inflation generalisation no longer grows, it remains widespread, with at least 50% of the household consumption basket increasing by more than 6% in February. However, some items of consumption seem to have been spared so far by the inflationary wave (see heatmaps). This is the case for goods and services in communication, health (except UK) and education (except in the euro area).
There are more positive signs. Producer prices disinflation continued for the three geographical areas. The outcome of the latest PMI surveys corroborates this decline, even though the PMI output price index picked up again in the United States in February.
Short-term (1-year) household inflation expectations are falling but remain well above the 2% target of central bankers. Markets are anticipating a larger decline: the 10-year breakeven rate stabilised in March at around 2% for the four largest eurozone countries, at 2.2% in the United States and 2.8% in the United Kingdom at the end of March.
Guillaume Derrien
