Inflation tracker: December 2023

The latest inflation data from the major developed economies have helped fuel the decline in bond yields and reinforced the conviction that the first policy rate cuts will take place in the first half of 2024 in the US, the euro area and the UK.

Harmonised inflation in the eurozone fell from 2.9% y/y in October to 2.4% in November. While this decline remains fuelled by greater energy deflation, the rise in industrial goods prices (excluding energy) and services is also slowing. Indeed, disinflation is tending to become more widespread: the share of CPI components with inflation above 4% now represents only about half of the total (51.3% to be precise), the lowest level since March 2022. The most significant decelerations in inflation came from Italy (-1.1 percentage points to 0.8%), Germany (-1.3 pp to 3.0%) and Finland (-1.6 pp to 0.8%). France recorded a smaller decline (from -0.7 pp to 3.8%), as did Spain (-0.3 pp to 3.2%). In addition, inflation differentials are narrowing across Member States (see chart of the month). The ECB will also take note of the decline in alternative inflation measures - in particular the weighted median fell back below 3% – and the stabilisation of households' long-term inflation expectations.

The decline in inflation in the United States was less significant than in the Eurozone, mainly due to the greater weight of the shelter component (+6.7% y/y in October), as well as a less negative contribution from energy. The ISM price paid indexes, for both manufacturing and services, have stabilised at pre-Covid levels, and are sending rather positive signals about further disinflation. However, household inflation expectations are surprisingly moving in the opposite direction: according to the University of Michigan survey, one-year and five-year expectations are rising again, the later reaching its highest level since 2011.

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