It may come as a surprise to you, but core inflation in the US has remained steady at 2% since July of last year.
That may sound like a parallel universe, and it certainly goes against everything we've heard about U.S. inflation so far this year.
But official data from the US, if you calculate inflation the same way as in Europe, shows that's exactly what's happening.
Before you get too excited, this is not an inflation indicator the Fed is watching, and you can't blame the market for not doing so.
But it's a reminder that how inflation is measured matters a lot: the US is notoriously much more housing-focused than Europe, and that helps explain why the more mainstream CPI data puts core inflation at 3.6%.
Still, the numbers don't always match up. James Knightley thinks next week's release of the PCE deflator (the Fed's preferred inflation metric) won't be as worrisome as the CPI numbers from a few weeks ago. Much of the discrepancy is due to auto insurance, but it's not something that's keeping policymakers up at night.
Either way, if US inflation is truly more moderate than we have believed, that must be good news for Europe. Let's look at the statistics I mentioned at the beginning: “harmonized” measures of US core inflation have been a good predictor of Eurozone data a few months later. See this week's chart below:
This relationship holds when looking at individual categories, too: items like food and consumer goods still contribute more to inflation in Europe than in the US, especially in the UK, and given the US experience, this situation is unlikely to last for long.
So maybe central banks here in Europe have a point when they say there's no need to fear the recent recovery in US data. But life is rarely that simple. Services inflation has not been a justification for a rate cut here in the UK. And, as Bert Collin explains, an unexpected uptick in eurozone negotiated wage growth is also a headache for the ECB. The latest eurozone inflation data is due next week.
The lessons for markets are twofold: If US inflation is really not that worrying, the Fed need not fear cutting rates. Recall that James K. is betting on three rate cuts starting this September, which is more than markets are currently expecting. And if eurozone inflation is really similar to the US, it will be hard for the ECB to continue its own rate cuts for long. As in the US, our team expects three rate cuts in the eurozone in 2024.
