Energy shock propagating at normal speed

Danske Research Team Danske Bank A/S

Overview: Headline inflation rose as expected in both the US and euro area in May. Core inflation surprised to the downside in the US due to weak goods inflation and to the upside in the euro area due to strong services inflation. The effect from the war in Iran on underlying inflation remain fairly muted so far as the energy shock is propagating at a normal speed. In China, we got further prove that the economy is moving from a deflationary to inflationary force.

Inflation expectations: Euro area’s 1-year inflation expectations have jumped to about 3.0%, but longer-term forward expectations remain well anchored. Surveybased inflation expectations have ticked higher across both euro area and the US.

US: May CPI landed close to consensus expectations in headline terms (+0.5% m/m SA and 4.2% y/y) and slightly below consensus in core terms (+0.2% m/m SA & 2.9% y/y). The increase in headline inflation was largely driven by energy, while food inflation slowed down. Shelter inflation cooled as expected after a technical one-off factor distorted the April reading higher. Health care inflation accelerated, but inflation for other services remained steady. Surprisingly, core goods prices outright declined (-0.11% m/m SA) despite the apparent rise in cost pressures. Overall, underlying price pressures appear to remain well in control.

Euro area: Euro area HICP inflation rose to 3.2% y/y in May from 3.0% in April, with the increase driven by higher energy prices and services inflation. Core inflation edged up to 2.5% y/y from 2.2%, as services inflation surprised to 3.5% y/y on the back of a very strong 0.4% m/m s.a. increase. The pickup in services inflation lacks a clear driver before we get the final print, though calendar effects, including bank holidays and the early Easter, may partly explain the move. Outside services, food and goods inflation momentum remained subdued.

China: PPI inflation increased further in May to 3.9% y/y from 2.8% y/y. PPI deflation is over and has moved from a deflationary force to inflationary force in the world. CPI inflation was unchanged at 1.2% y/y.

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Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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