Inflation: the chart of the month
In his opening remarks at Jackson Hole on 25 August 2023, Jerome Powell provided a fairly detailed analysis of US inflation, focusing in particular on the three main components of core PCE* inflation to be monitored in order to track the disinflation process. The chart illustrating his comments is reproduced here.
Two encouraging trends emerge – the sharp fall in core goods inflation and the beginning of the decline in housing services inflation – but also, and above all, a third concerning trend: the absence of a fall in non-housing services inflation, which account for over half of the core PCE*. The stability of this curve at a high level since the third quarter 2022 is, in large part, driven by the dynamism of wages.
It illustrates perfectly the stickiness of core inflation. Whether or not the Fed continues to hike rates is conditioned by the evolution of this non-housing component, whose decline depends on the continued easing in labour market tightness, through stronger supply and weaker demand.
Other key points:
In the UK, the inflation situation remains problematic. Inflation continues to spread, raising concerns about second-round effects. While the consumer price index rose by only 6.8% in July, compared to 7.9% in June, core inflation has now reached a higher level (6.9% in July and June). Almost 53% of goods and services had posted inflation of more than 6% in July, a record proportion. This inflationary momentum is continuing to spread to wages, with wages now rising more than inflation (7.8% y/y, excluding bonuses, over the last 3 months to the end of June). Against this backdrop, the Bank of England was forced to maintain its monetary tightening, bringing its key rate to 5.25% in August (14th consecutive hike). The BoE is expected to continue this movement in September, with an increase which may not be the last.
In Japan, inflation continues to normalise. As a result, goods and services with falling prices, only accounted for just under 6% of the total in July (compared with 31.5% a year ago), a very low figure for a country that has been showing deflationary trends for almost three decades. Core inflation (excluding energy and fresh food products) reached its highest level in June, at 4.3% y/y, and stabilised in July at this level. The break-even inflation rate rose but remained relatively contained at almost 1.4% on 5 September. Market expectations remain reasonable and are not calling for monetary tightening for the time being.
In the US, disinflation seems to be slowing. The consumer price index (CPI) and the personal consumption expenditure price index (PCE) reached 3.3% y/y in July, well below levels prevailing a few months ago. But core inflation rebounded in July according to the PCE (from 4.1% to 4.2%) and fell moderately according to the CPI (from 4.9% to 4.7%), after dropping more sharply in the past. The same message was conveyed of a pause in terms of consumer year-ahead inflation expectations, which reached 3.5% in August compared to 3.3% in June (figures from the University of Michigan). Although in our scenario, the Fed is expected to stop raising its key rates, these latest figures raise concerns, which cannot be removed by the break-even inflation rate (2.24% on 5 September).
Within the eurozone, inflation divergences remain significant in August, with very high inflation in Central Europe, especially in Slovakia and Croatia (9.6% and 8.5% respectively). A rise in inflation was seen in France (5.7%, now above the eurozone average), due to a greater rise than elsewhere in energy prices (gradual reduction in the price cap on electricity). In Germany, inflation stabilised before a more than probable decline in October (base effects). In the eurozone as a whole, the question of persistent inflation remains: inflation and wage curves have not yet crossed, but they might do so from Q3 onwards.
In all areas, PMI indices on input prices have been suggesting for several months that inflationary tensions in terms of goods should disappear. For the time being, the slight upturn in delivery times is not enough to counteract this positive factor, but changes to these delivery times will need to be monitored, as will inflation in services, where inertia could delay the expected disinflation.
