Eco Charts

Inflation Tracker - March 2023 | Resistance to the downside

03/15/2024
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Consumer price disinflation stalled at the beginning of the year in Europe and the United States. With the tailwinds of energy price deflation fading, core inflation, which is still high, now accounts for almost all of the price increases in the United States. This is less true in the euro area and the United Kingdom, where food inflation still contributed almost a third to headline inflation in January. The decline in inflation in 2023 has led, in all areas, to a downward shift in household inflation expectations in the short-term (1 year) towards long-term expectations (5 years). Wage growth continues to outpace inflation and fuel a recovery in purchasing power, which appears to be stronger in the United States and the euro area than in the United Kingdom.

In the United States, the growth of the shelter component slowed below 6% y/y in February. This development is reflected clearly on the chart on inflation generalisation (page 7), given that this category has a large weight in the consumer price index. Conversely, the United Kingdom continues to record a significant proportion of goods and services with an inflation rate above 6%.

The trend is, at this stage, different in Japan. Inflation fell to 2.1% y/y in January, the smallest increase since March 2022. As the energy subsidies introduced by the Kishida administration downwardly impacted February 2023 CPI figure, a large base effect will, barring any surprises, lead to a rebound in inflation in February 2024. This rebound was indeed already visible in leading Tokyo CPI, which rose 2.5% y/y in February, compared to 1.8% y/y in the previous month. At the national level, core inflation slowed to 2.0% y/y in January.

We still expect the Bank of Japan to be the first central bank to act, not by cutting rates, but by ending its negative interest rate policy, potentially as soon as at the March 18-19 meeting. The first results of the annual wage negotiations (Shunto) for 2024 seem to attest stronger wage concessions from companies compared to 2023[1], which would support BoJ members in their idea of initiating monetary normalization. The Fed, the ECB and the BoE would all proceed with a first rate cut in June, according to our current forecasts.

[1] See Financial Times article, Japanese workers secure biggest pay rise in three decades, March 13, 2024.

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.


[1] The shelter component of inflation and the margin behaviour of firms are two other important factors to watch.

[2] Sectoral price dynamics in the last mile of post-Covid-19 disinflation (bis.org), 4 March 2024

[3] Regime shifts and the last mile of disinflation | CEPR, 13 December 2023