High services inflation remains a worry for central banks
Overview: Inflation drivers continue to paint a mixed picture but inflation is likely to head lower through 2023 in US and the euro area. Price pressures from food and freight rates have clearly eased as has energy and electricity prices in Europe. Labour markets remain tight, but wage pressures have showed tentative signs of easing. Core inflation pressures remained elevated in January both in the euro area and the US, and we expect the ECB and the Fed to react by continuing to hike interest rates in the spring meetings.
Inflation expectations: Both US and euro area consumer inflation expectations have remained elevated, but off the peak levels. Some short-term US indicators rose modestly, but market-based long-term inflation expectations remain broadly stable.
US: US January CPI came out in line with our expectations: headline +0.5% m/m and core +0.4% m/m. That said, the details suggested that underlying price pressures remained elevated. Core services CPI excl. shelter & health care ticked higher to 0.65% (from 0.35%), and core goods prices rose for the first time in three months (+0.07%). The more positive leading macro indicators and elevated PMI price indices suggest that companies are still able to pass high input costs onto consumer prices. Wage inflation pressures eased towards late 2022, but remain too fast for the Fed. Furthermore, the strong January Jobs Report and higher JOLTs Job Openings point towards further upside risks. Shelter inflation also remains elevated, but while forecasting short-term developments is difficult, we expect it to cool towards the summer.
Euro: Euro area headline inflation continued to ease for a third month to 8.5% in January, but with core inflation marking yet another record high at 5.2%, as many firms again used the turn of the year to adjust prices to a new input cost reality. Elevated selling price expectations (especially for services) suggest this process is far from finished. A range of technical mishaps surrounding the German inflation figures leave the risk of upside revisions. With the economy and labour market holding up better than expected (see also Euro macro notes - From recession to stagnation, 2 February), 'stickily' high core inflation could remain a worry for ECB for some time yet.
China: CPI rose to 2.1% y/y from 1.8% y/y in December, still comfortably below the 3% target. PPI inflation declined to -0.8% y/y from -0.5% 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.
