Global inflation watch: Inflation expectations heading lower

Overview: Underlying inflation has moderated in the US and is also more wellbehaved in euro area. Inflation pressures ease gradually with weak goods inflation and in the case of US, cooling job market and lower wage growth. In the euro zone, wage growth remains sticky despite some easing in the latest Q2 data. Concerns of slowing global growth have driven oil and metal prices lower, which has sharply weighed on markets’ short-term inflation expectations. We expect the ECB to cut rates on a quarterly basis and the Fed in every meeting until June.

Inflation expectations: Market-based short-term inflation expectations have declined with global oil prices. Consumers’ inflation expectations have also moderated, but more gradually. The level of most inflation expectations measures has now returned close to pre-pandemic averages.

US: The August CPI was close to expectations on headline level (+0.2% m/m SA & 2.5% y/y; July +0.2% / 3.2%). Core inflation was slightly faster than expected (+0.3% m/m SA & 3.2% y/y; July +0.2% / 3.2%), but the uptick was mostly driven by owners’ equivalent rent (OER). Contribution from other services sectors, core goods, food and energy were close to expectations. As the OER lags changes in the rental market by 10-11M, the upside surprise will not derail the Fed from cutting rates next week, but the reading still supports our case for only a 25bp move.

Euro: Dropping to a three-year low, headline inflation for August was 2.2% y/y – in line with expectations – driven mainly by base effects in energy prices. The underlying price pressure continued to be sticky as core inflation stood unchanged at 2.84% y/y, with the monthly measure at 0.27% m/m SA. This attributed to continued strong services inflation at 0.42% m/m SA (4.15% y/y) stemming from elevated cost pressures amid high wage growth and the strong labour market. Coupling this with rising goods selling price expectations, we foresee core inflation to only gradually decline and hit 2% in Q4 2025, while headline inflation could hit 2% next month and is expected to average 2.1% in 2025.

China: August CPI rose from 0.5% y/y to 0.7% y/y but core CPI dropped to 0.3% y/y from 0.4% y/y, a two-year low. PPI dropped to -1.8% y/y from -0.8% y/y.

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