Overview: Inflation drivers continue to paint a mixed picture, but inflation is likely to head lower through 2023 in the US and euro area. Price pressures from food and freight have clearly eased, and while oil prices have risen since summer, contribution to annual inflation still remains negative. Underlying inflation and wage growth have begun to ease in the US, but remain sticky in the euro area. Tight labour markets continue to support upside risks to core inflation in both areas going forward. We think that most western central banks are now done with their respective hiking cycles.
Inflation expectations: Consumers’ short-term inflation expectations have moderated especially in the US, but still remain somewhat above pre-pandemic levels. Markets’ longer-term inflation expectations edged slightly higher in the US over the past month, but remain consistent with the Fed’s target for now.
US: September CPI surprised to the upside for the second month in a row, as headline CPI rose by 0.4% m/m SA (from 0.6%; consensus 0.3%). Core CPI was better aligned with expectations at +0.3% m/m (from +0.3%; consensus 0.3%). Energy contribution declined, although slightly less than expected. The upside surprise was driven especially by shelter and health care inflation, both of which are distorted by lagged calculation. On other core services sectors, broader price pressures eased (0.42%; from 0.71%) reflecting past moderation in wage inflation. Core goods prices declined (- 0.39%), as the UAW strike has not yet had a significant impact on used car prices.
Euro: Inflation fell significantly in September, but it was mainly due to base effects. The decline in inflation was broad-based as headline inflation declined to 4.3% y/y from 5.3% y/y in August and core inflation ticked down to 4.5% y/y from 5.3% y/y. Yet, the monthly growth rates also showed positive signs as core inflation increased at the slowest pace since April 2021. Overall, the print is positive news for the fight to bring down inflation, but the underlying inflationary pressure is still worrying for the ECB. Looking ahead we expect base effects and declining momentum to pull inflation lower with average inflation in 2023Q4 of 3.2% y/y compared to 5.0% y/y in 2023Q3.
China: CPI for September fell to 0.0% y/y from 0.1% y/y in August while core CPI stayed was flat at 0.8% y/y. PPI rose to -2.5% y/y in September from -3.0% y/y.
