In the four zones covered (United States, Eurozone, United Kingdom, Japan), wage growth continues to outstrip inflation, supporting household purchasing power gains, but contributing, apart from Japan, to keeping inflation in services at high levels. Price pressure indices (page 19) and producer prices are recovering moderately.
In the US, the CPI report for May shows encouraging signs of disinflation. The index, which excludes food, energy and shelter, fell below 2% year-on-year for the first time since March 2021. This mainly reflects the stronger deflation in durable goods, particularly used vehicles (-9.3% y/y compared with -6.9% the previous month), while inflation in services was down slightly but still high, at 5.2% compared with 5.3% in April. Household inflation expectations over the medium term (1 year) and long term (5 years) have both moved back into line with observed inflation (page 21).
In the Eurozone, inflation picked up slightly, rising from 2.4% y/y in April to 2.6% in May, with a particularly marked rebound in Portugal (+1.5 pp, to 3.8%), Cyprus (+0.9 pp, to 3.0%) and to a lesser extent in Germany (+0.4 pp, to 2.8%) and Spain (+0.4 pp, to 3.8%). Conversely, inflation fell in Latvia (-1.1 pp, to 0.05%), Greece (-0.8 pp, to 2.4%) and Croatia (-0.4 pp, to 4.3%). The ECB will also take note of the slightly favourable trend in the PCCI index, which fell from 1.8% year-on-year in April to 1.7% in May, even though the weighted median rebounded from 2.5% to 2.8%. The “supercore” measure is stable at 2.9% y/y (page 9). While forecasters' medium and long-term inflation forecasts are fairly close to the current level, household forecasts remain well above it (page 22).
Inflation in the UK made a remarkable return to target, falling back to 2% in May, thanks in particular to stronger deflation in energy. In fact, the UK is the only economy of the four major blocs to continue to benefit from this effect, while inflationary pressures are again emerging on this component in the US, the eurozone and Japan (page 6). This favourable effect is set to continue this summer, due to the planned 7.2% cut in the ceiling on regulated gas and electricity tariffs, following the 12.3% reduction agreed in April. Durable goods were the second biggest deflationary item (-3.8% y/y), driven down mainly by used vehicles (-11.2%) and large household appliances (-7.5%). Core inflation has also eased, to 3.5%, but inflation in services remains high (5.7%).
In Japan, inflation is falling again, after a slight rebound over the winter. Total CPI inflation slipped from 2.7% y/y in March to 2.5% in April, the same rate as the core measure (excluding fresh food and energy). The annual rise in food prices, which in April accounted for more than a third (1.1 percentage points) of total inflation, nevertheless eased to 4.3%. On the other hand, market expectations, reflected by the break-even inflation rate, and household expectations are rising, as are scheduled earnings, which broke through the 4% year-on-year barrier in April (page 27).
Chart of the month: Eurozone: The key role of the wages-margins-productivity triangle
Eurozone: GDP deflator components
For some time now, in its monitoring of the disinflation trajectory in the euro area and to track the conditions for its continuation, the ECB has been paying attention to the wages-margins-productivity triangle, expecting slower wages growth, a compression of profit margins, and a recovery in productivity gains. However, the latest available data, at least on wages and productivity, are not yet fully encouraging. Hourly labour productivity gains continue to evolve in negative territory (0.3% year-on-year decline in Q1-2024 according to ECB data), although at a slower pace than in the previous three quarters. Compensation per employee increased 5% y/y in Q1-2024, a slight acceleration from Q4-2023 (4.9% y/y). This is a slightly slower pace than in the first three quarters of 2023 (which was above 5%), but the moderation remains to be confirmed and amplified.
As for corporate margins, they are particularly the focus of attention. As a result of the circumstances that prevailed at the end of the Covid-19 crisis (strong demand rebound, strong supply constraints), companies have regained pricing power: the significant concomitant increase in 2021 and part of 2022 in the PMI components relative to input and output prices well illustrates this (see charts on page 18 of our Inflation Tracker).
The significant contribution of unit profits to inflation, as measured by the GDP deflator, in 2022 and in the first half of 2023, as can be seen from the graph, is another case in point. This has fueled the topic of “greedflation” (profits-push inflation). However, attention must be paid to the upward bias introduced by the large sectoral disparities behind this aggregate result. It would also appear that the phenomenon lasted only a short time, with the contribution of unit profits to inflation falling sharply in the second half of 2023, and then almost disappearing in 2024 according to ECB projections. We are in line with this expectation that businesses will somewhat squeeze their margins to absorb the rise in unit labour costs. But the extent of this compression remains to be seen, and whether it will actually help bring inflation closer to the target, while rising pressures on unit labour costs, via wage dynamics and low productivity gains, remain high.
