Focus on alternative measures of Eurozone inflation
Whilst euro area August inflation figures warned of the slowness of disinflation, September data (Eurostat’s preliminary estimates) point to an acceleration and an amplification of disinflation.
Headline and core inflations fell by almost one percentage point year-on-year. Besides, the decline is driven by the four main HICP items (harmonized index of consumer prices): manufactured goods (contribution down -0.1 percentage points), services (-0.3), food (-0.2) and energy (-0.1). Headline and core inflation remain high (4.3% and 4.5% y/y respectively) but their fall is becoming more visible.
The decline in the various alternative measures of inflation (less volatile and more trend-informative measures of inflation), the main ones being shown in the graph, strengthens the encouraging global picture. The decrease in the persistent and common component of inflation (PCCI) is the most marked (this measure of inflation is the only one below 3%, since June 2023) and the earliest (the indicator turned downward in early 2022). This is a strong disinflationary signal of the diminishing persistence of inflation and its commonality across euro area countries and HICP items.
The so-called “supercore” measure goes beyond a purely statistical analysis, excluding the most volatile components of inflation: it makes an explicit link to macroeconomic conditions. Indeed, the “supercore” index is based on the core components of the HICP deemed sensitive to slack (as measured by the output gap). The fall of this measure has begun, but so far it is more moderate than that of other alternative measures of inflation.
The inflation measures based on median and trimmed means (10%)[1] are closer to the headline print: they rose significantly higher than the other alternative measures of inflation and have fallen more sharply since their peak in October 2022 (by, respectively, -2 and -3.3 points, and -6.3 points for headline inflation).
In addition to these encouraging developments in inflation and its alternative measures, first signs of moderation in wage growth are visible too. According to the monthly wage tracker developed by the Central Bank of Ireland, wage growth fell to below 4% y/y in August (3.9%), from a high of 5.3% in September 2022.
The other key points:
• In the United States, core inflation dropped again in August, as did the pace of wage growth: both were at 4.3% y/y. The fall in services inflation continued (to 5.3% y/y), led by a more significant decrease in medical care prices (-2.1%y/y) and gas prices (-16.5%). Conversely motor vehicle insurance prices rose more strongly (19.1% y/y). The shelter component, which is included in services and accounts for one-third of the CPI, continued to ease but inflation here remains high (7.3% y/y). The University of Michigan indices are also showing a downward shift in household expectations of inflation in 1 year towards 5-years expectations. Both measures are now at around 3%, which is very close to the estimates in professional forecasters’ surveys.
• In the eurozone, headline inflation has fallen slightly below core inflation since July. All alternative measures of inflation are falling, with the biggest fall recorded by the PCCI, below 3%now. Large inflation differentials between member states remain: while The Netherlands saw slight deflation in September (-0.3% y/y), Slovakia is still posting figures close to 9% (8.9%). Among the four biggest economies, there were slight rises in Spain (3.2%) and Italy (5.7%), whilst inflation fell slightly in France (5.6%) and more significantly in Germany (4.3%). Wage settlements in the eurozone are likely to catch up with inflation in the third quarter, which will support household purchasing power but reduce the pace of disinflation.
• The situation in the United Kingdom remains the most worrying, but the latest developments have been relatively positive. Headline inflation fell by 0.3 points in August, to 6.3% y/y, and the short-term momentum measure (3m/3m) suggests a bigger fall over the autumn. The core measure (6.2% y/y) is also likely to drop more significantly over the fourth quarter. However, inflation as measured by the Retail Price Index (RPI) is stronger than the CPI measure, due mainly to higher mortgage interest payments (+60.3% y/y) which are not included in the latter. Although the Bank of England voted by a narrow majority (five votes to four) to leave interest rates unchanged in September, falling inflation over the coming months is likely to strengthen the case for the status quo.
• In Japan, the new inflationary context is leading to a recalibration in market expectations: the inflation breakeven rate rose above 1.5% in September. This is the first time in ten years that the breakeven rate has risen above this threshold. The alternative inflation measures scrutinised by the BoJ are still rising, while more than 40% of the CPI basket is now showing annual price increases above 2%. The sharp depreciation of the yen in 2023 will generate more imported inflation. These trends are pushing JGB yields upwards, particularly the 10-year rate, which is now approaching the 0.8% threshold and thus closing in on the BoJ’s intervention ceiling, which is currently 1%.
