Central banks welcome easing wage inflation

Overview: Inflation drivers continue to paint a mixed picture but inflation is likely to head lower through 2023 in US and the euro area. Price pressures from food and freight rates have clearly eased while metal prices have recovered lately. Energy and electricity prices have declined sharply amid warmer weather in Europe. Labour markets remain tight, but wage pressures have showed tentative signs of easing as economies are cooling down. In December, core inflation continued to pick up speed in the euro area, while US CPI showed some easing in underlying inflation pressures. Looking forward, easing financial conditions, less negative growth outlook and the recovery in China continue to pose upside risks to inflation in 2023.

Inflation expectations: Both US and euro area consumer inflation expectations have remained elevated, but off the peak levels. Market-based long-term inflation expectations have remained stable over the past month.

US: On first glance, US December CPI came out close to our and consensus expectations: headline -0.1% m/m (forecast 0.0%) and core +0.3% m/m (+0.3%). While core services inflation picked up more than expected (0.5%; from 0.4%), the uptick was driven by faster shelter and health care inflation, while broader wage-sensitive inflation cooled. The contribution from core goods CPI was slightly less negative than in November, but the normalizing consumption will likely continue pushing prices gradually lower in the coming months. Energy prices also declined, and food price inflation continues to ease. Overall the early signs of easing wage and core services inflation ease the pressure on the Fed to continue hiking rates aggressively in the spring.

Euro: While markets cheered another marked decline in headline inflation to 9.2%, the same cannot be said for core inflation which reached a new record high of 5.2% in December. For the time being, lower energy prices and base effects, as well as government interventions are pushing down headline inflation. However, with a tight labour market and still elevated selling price expectations, high core inflation will likely remain a worry for ECB for some time. In a positive development, consumer inflation expectations and high-frequency wage growth measures have eased a bit lately.

China: CPI increased from 1.6 % y/y to 1.8% y/y in December and CPI ex. food was unchanged at a low 1.1%. PPI increased to -0.7% y/y from -1.3% y/y.

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