Global Inflation Watch: Euro inflation shock keeps getting worse

• Overview: Inflation pressures from oil, metals, food and freight rates have come down but labour markets remain tight in US and Europe keeping wage pressures high. The euro area was hit by a further inflation shock over the summer from the sharp rise in gas and electricity prices. Looking forward, we expect inflation to stay high in the short term (rise further in the euro area) but decline during 2023 as recession looms.
• Inflation expectations: Market-based long-term inflation expectations are moving broadly sideways and still above 2%. US and euro household inflation expectations show tentative signs of rolling over but are still high.
• US: CPI inflation fell below expectations to 8.5% y/y in July, as CPI growth stalled on m/m basis due to a clear decline in gasoline prices. Core inflation moderated as well due to easing energy prices feeding into lower air fares and transportation costs. Supply chain challenges in Asia have also showed signs of easing. That said, fast wage inflation supported by very tight labour market conditions continues to fuel underlying price pressures. Rebound in purchasing power supported the downbeat consumer sentiment in August, and the level of private consumption remains brisk. 
• Euro: Another record high for HICP (8.9%) and core inflation (4.0%) during July, keeps the pressure for another 50bp September ECB hike alive, as inflation concerns still take precedence over the clouding growth outlook. Firms' pricing power is coming under pressure from the weaker demand environment and inflation expectations (both survey and market-based) have moderated amid rising recession fears. That said, the inflation drag from Germany's energy relief measures will vanish at the end of August and higher consumer gas prices will bring another boost to energy price inflation in Q4. The drought in Europe, low water levels in the Rhine and surging electricity prices are also adding to pro-inflationary risks. All this makes any significant retreat of headline inflation in 2022 unlikely and in our view it will take at least until mid-2023 before negative base effects pull the headline rate towards 2% again.
• China: CPI moved up to 2.7% y/y in July from 2.5% y/y but it was driven by pork prices. CPI ex food rose 1.9% y/y. PPI inflation fell further to 4.2% in July 

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