Global inflation watch: Price pressures moderating, but only gradually

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 falling inflation expectations, and in the case of US, cooling job market and lower wage growth. In the euro zone wage growth is still sticky. Oil prices declined after the weak US Jobs Report, but we are not yet concerned about an imminent recession. We still expect central banks to cut interest rates only gradually.

Inflation expectations: Market-based short-term inflation expectations declined after the weak US Jobs Report. Consumers’ inflation expectations have also continued moderating, although more gradually.

US: July CPI came out well in with line expectations on a headline level (+0.2% m/m SA, cons. +0.2%; prev. -0.1%) while core inflation was slightly below forecast (+0.16% m/m SA, cons. +0.2%, prev. +0.1%). However, volatile health care prices and deepening core goods deflation pulled the core figure lower, and importantly, broader services inflation accelerated after lower readings in May and June. Shelter inflation picked up speed to +0.38% m/m (from +0.17%) and Core services excl. shelter and health care was +0.55% m/m (from -0.13%). Energy contribution lifted headline inflation while food inflation remained mostly steady. In our view, the print strengthens the case for the Fed cutting by only 25bp in September.

Euro: July’s inflation report was largely as expected. Headline inflation rose to 2.6% y/y from 2.5%, while core inflation stayed put at 2.9% y/y, slightly above consensus of 2.8%. Notably, core goods inflation grew at the fastest rate in a year, following a year of almost no price increases. This contrasts with services inflation that saw significant upticks in the beginning of 2024, but now have fallen and stabilized at 0.3% m/m s.a. for the second consecutive month. That said, services price pressure remains too strong for the ECB’s liking, still posing an upside risk to the inflation outlook. With core goods inflation normalizing and services still elevated we expect core inflation to remain sticky the remainder of the year.

China: July CPI rose from 0.2% y/y to 0.5% y/y while Core CPI dropped to 0.4% y/y from 0.6% y/y. PPI was unchanged at -0.8% y/y in July.

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