Overview: Higher oil prices and very tight labour markets continue to keep inflation pressures high. There is some relief, though, from lower gas prices and some foodstuff prices. The decline in freight rates has come to a halt lately but they are still lower from the peak. . US gasoline prices have continued higher now nearing USD5 per gallon. While we look for a peak in inflation soon in the US and euro area, it is expected to remain high into 2023.
Inflation expectations: Market-based long-term inflation expectations are moving broadly sideways and still above 2%. US household inflation expectations jumped to a new high in May and looks increasingly unanchored. Euro consumer inflation expectations are also high but declined in May.
US: CPI increased 1.0% in May compared to 0.3% in April. The higher inflation was primarily driven by increases in the energy index of 3.9% and the food index of 1.2% during the month. However, core CPI still increased by 0.6% which highlights that inflation is broadly based and not only driven by rising energy prices. Inflation rose 8.6% for the 12 month ending in May, which is the largest increase since December 1981. The high underlying inflation adds fuel to the Federal Reserve’s plan to raise interest rates. We expect that core inflation to stay elevated for the rest of the year.
Euro: Headline inflation rose to yet a new record high of 8.1% in May, driven by a further surge in food, energy and goods prices. Rising input costs are still working their way through the pricing chain, keeping goods price inflation elevated well into 2023 in our view. Service price inflation also remains supported by pent-up demand for travel and recreational services. Overall, we project core inflation to remain above target, averaging 3.5% in 2022 and 2.9% in 2023. The continued building of underlying inflation pressures leaves little room for complacency for ECB, especially as producer prices have yet to see a peak, inflation expectations still stand above the 2% goal and negotiated wage growth picked up to 2.8% in Q1 (from 1.6% in Q4 21, although partly due to one-off payments in Germany).
China: CPI inflation remained low in May at 2.1% leaving room for Chinese stimulus. PPI inflation declined from 8.0% y/y in April to 6.4% y/y in May.
