The challenge of inflation: Five things to look out for

Inflation is no longer the No. 1 economic problem that it has been for the past three years, but it remains a major challenge. While it has not reached its 2% target yet, and the last pockets are slowly deflating, new inflationary pressures are mounting. At this stage, those pressures are limited but not negligible and new inflationary risks, linked to the economic and geopolitical context, are taking shape. The Fed's task is becoming more complicated by the risk of a US stagflation, and the ECB's one happens to be slightly trickier when balancing between downside and upside risks on growth.

Still heading in the right direction overall. The latest data available for the United States (January) and the euro area (February, preliminary estimate) continue to point in the right direction overall. In the euro area, both headline and core inflation (for the first time since September 2024 for core inflation) fell slightly (-0.1 points to 2.4% and 2.6% y/y, respectively). The most encouraging point is the decline in services inflation, which can be expected to continue (after remaining stable at around 4% for just over a year). The process is likely to remain slow, as services inflation continues to be underpinned by the post-Covid shift in household consumption from goods to services, as well as by delayed adjustments to certain regulated prices[1]. However, the ongoing moderation in wage dynamics in the euro area is likely to fuel the disinflation process.

In the United States, January's inflation data were more mixed, but slightly positive on balance. CPI inflation rose by 0.1 points for both headline inflation (3% y/y) and core inflation (3.3%), but services inflation continued to decrease. What’s more, inflation measured by the PCE deflator the Fed's preferred indicator fell slightly for headline inflation (-0.1 points to 2.5%) and more sharply for core inflation (-0.3 points to 2.6%). In addition, wage dynamics are also moderating in the United States but to a slightly lesser extent than in the euro area.

Download the Full Report!