Global Inflation Watch: The Fed welcomes easing supercore inflation
Overview: Underlying inflation momentum has moderated in the US and remained elevated in euro area so far in Q2. Inflation drivers paint a mixed picture with weak goods inflation and strong services inflation, but inflation is likely to edge lower in 2024. Energy and metal prices have moved lower over the past month. Tight labour markets continue to support upside risks to core inflation despite signs of gradual easing. We expect central banks to take a cautious approach to cutting policy rates.
Inflation expectations: Short-term inflation expectations have edged higher in the US according to both markets & consumer surveys and remain steady in the euro area. Longer-dated measures remain well anchored close to the 2% target level.
US: May CPI surprised to the downside in both headline (+0.01% m/m SA; forecast +0.19%) and core (+0.16% m/m SA; forecast +0.25%) terms. Importantly, May marked the 2nd consecutive month of cooling across housing and non-housing (‘supercore’) services inflation, with the latter accounting for the majority of the downside surprise in core inflation. This is a signal of further easing in underlying price pressures and supports our call for two Fed cuts in 2024. Energy contribution was negative with lower oil prices, while core goods deflation continued in line with expectations. Food price inflation remains close to past months’ average levels.
Euro: The May inflation figures were higher than expected, with headline at 2.6% y/y (cons: 2.5%), and core at 2.9% y/y (cons: 2.7%). The uptick was mainly driven by continued elevated service inflation, which rose to 4.1% y/y. Service prices increased 0.53% m/m s.a., which sent the 3m/3m SAAR rate to 5.3%. Hence, the print corroborated the narrative we have seen in recent months, namely that service prices continue to fuel strong underlying inflation pressure. The strong services inflation poses an upside risk to the inflation and ECB policy rate outlook. Yet, we expect headline inflation will flatline over the summer and then decline from the second half of 2024 as inflation momentum outside services is well-behaved.
China: May CPI was unchanged at 0.3% y/y (cons: 0.4%). Core CPI fell to 0.6% y/y from 0.7% y/y. PPI increased from -2.5% y/y to -1.4% y/y.
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.
