Overview: A rise in commodity prices, tight labour markets and high inflation expectations has lifted inflation further. However, risk of recession may soon be dampening pricing power among businesses. Freight rates are elevated but off the highs. We look for US core inflation to rise further and peak at 6.6% in March 2022 before easing to around 4.6% by end-2022. We expect euro core inflation to rise above 3% in the coming months and stay around ECB’s 2% target in 2023.
Inflation expectations: Market-based long-term inflation expectations have moved higher. US household long-term inflation expectations are at a 10-year high. Euro household price expectations have stabilized at a high level.
US: CPI inflation rose to 7.9% y/y in February and we expect further increases near-term due to higher energy and food prices. Underlying price increases remain high, as CPI and CPI core rose 0.8% m/m and 0.5% m/m, respectively. Inflation expectations remain high (especially near-term) and nearly 50% of small businesses expect to hike prices in 3M. It puts a lot of pressure on the Fed to tighten policy quickly in order to get inflation back towards 2%. Early signs wage growth is peaking based on surveys.
Euro: Inflation pressures continue to build at an unrelenting pace, as higher input costs are still working their way through the pricing chain. 60% of core inflation items now have inflation rates above 2%. Headline and core inflation rose to new record highs of 5.8% and 2.7%, respectively, in February. Negotiated wage growth remained moderate in Q4 21 at 1.6% (up from 1.3% in Q3), but inflation rates well above target throughout the year raise the risk of higher inflation expectations fuelling wage adjustments down the line. We expect to see further core inflation increases ahead, keeping pressure high on ECB to normalise policy (read more in Big Picture – Headwinds to the global economy from Ukraine war and Fed tightening, 17 March).
China: Chinese PPI inflation dropped to 8.8% y/y in February further down from the peak in October at 13.5% y/y. CPI is running at 0.9% y/y held down by food prices.