Unpleasant US surprise, Euro inflation better behaved

Overview: The underlying momentum in inflation is picking up in the US while it continues to move lower in the euro area. Inflation drivers paint a mixed picture with weak goods inflation and strong service inflation, but inflation is likely to trend lower in 2024. Freight rates have picked up due to the tensions in the Red Sea, but not to the extent that we would expect another significant pick-up in core goods inflation. Oil prices have stabilized, and gas prices have continued trending lower. Tight labour markets continue to support upside risks to core inflation going forward and points to a cautious approach in central banks’ easing cycles.

Inflation expectations: Both market and survey-based inflation expectations have declined further over the past month amid some volatility in the US. Market based inflation expectations are now almost consistent with the 2% inflation targets.

US: January CPI came out above expectations with a core inflation print of 0.39% m/m (consensus 0.3% m/m) while headline inflation was up 0.3% m/m (consensus 0.2% m/m). The surprise was driven by a broad-based increase of service prices with the ‘super core’ (services ex. shelter) rising 0.85% m/m putting it on a rising trend. On the other hand, core goods prices were low at -0.3% m/m. The sharp monthly rise in the ‘super core’ signals some one-off effects from companies adjusting only prices in January. But overall, the CPI report points to risks of more persistent underlying inflation in the US and lowers the probability of a cut already next month.

Euro: Headline inflation printed 2.8% y/y (-0.4% m/m) in January, which was broadly as expected while core inflation increased 3.3% y/y (prior: 3.4%). Food and service inflation drove the print while goods inflation continued to fall significantly. There were a lot of one-offs affecting inflation from different government measures that ended as well as the fact that companies tend to adjust prices in January. While these factors were visible in core services and energy inflation it was not to a large extent. Hence, the current momentum in core inflation stopped falling but it is likely to turn lower as one-offs fade. Overall, the January print should not have changed ECB’s assessment.

China: January CPI fell to -0.8% y/y from -0.3% y/y in December. CPI is still held down by a big decline in food prices, but core CPI also fell from 0.6% y/y to 0.4% y/y.

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