Global inflation watch: Underlying price pressures remain sticky

• Overview: Inflation drivers continue to paint a mixed picture, but inflation is likely to head lower through 2023 in the US and euro area. Price pressures from food, freight and energy have clearly eased. Underlying inflation and wage growth have begun to ease in the US, but still remain uncomfortably high for now. In euro area, broader price pressures remain high, with tight labour markets continuing to point towards sticky core inflation going forward. We expect the ECB to hike rates for a final time in September, while the Fed is already likely done with its hiking cycle. 

• Inflation expectations: Consumers' short-term inflation expectations have edged lower especially in the US, but still remain somewhat above pre-pandemic levels. Markets' longer-term inflation expectations have remained relatively stable over the past month, following steady rise in euro area expectations earlier in the year.

• US: August CPI surprised to the upside, with Core CPI rising by 0.3% m/m (July 0.2%). Headline CPI rose more sharply, reflecting higher oil prices (0.6% m/m, July 0.2%). Services explained most of the uptick in Core CPI, with especially airfares contributing to the rise (+4.9% m/m SA, July -8.1%). But even excluding the latter, underlying price pressures seem to have remained slightly stronger than expected in Q3. Core goods prices remained stable, while shelter contribution continues to moderate largely as expected. Wage growth has eased as labour markets are becoming more balanced, and we continue to expect further disinflationary signs over the coming months. 

• Euro: Inflation in August was slightly higher than expected. Headline inflation remained at 5.3% and core inflation ticked down from 5.5% to 5.3% y/y. NEIG declined to 4.8 % from 5.0% while service inflation edged lower to 5.5% from 5.6% in July. The overall message from the inflation figures was that the disinflationary process is underway, but not at a pace that can make the ECB confident in a timely return to the 2% target. Lower energy prices will push inflation further down in 2023, but the underlying price pressures particularly in services are apparent. Tight labour markets will support core inflation where momentum is still close to 4% (3m/3m SAAR). 

• China: CPI in August rose to 0.1% y/y from -0.3% y/y in July while core CPI stayed flat at 0.8% y/y. PPI rose to -3.0% y/y in August from -4.4% y/y lifted by oil prices.

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