Global inflation watch: Underlying services inflation remains elevated

Overview: Underlying inflation momentum remains elevated in the US and is more well-behaved in 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. Energy prices have moved mostly sideways over the past month. Tight labour markets continue to support upside risks to core inflation despite signs of gradual easing. We expect central banks to take a cautious approach to cutting policy rates later in the year.

Inflation expectations: Short-term market-based inflation expectations have edged higher in the US and remained steady in the euro area. Longer-dated and survey-based measures remain well anchored close to the 2% target level.

US: February CPI came once again above expectations, with headline CPI at +0.44% m/m SA (Cons. +0.4%; Jan. +0.31%) and core CPI at +0.36% m/m SA (Cons. +0.3%; Jan. +0.39%). Energy contribution pulled the headline figure higher, while food price inflation stalled. Non-housing services inflation remained steady from January, but contribution from often volatile/distorted health care prices fell sharply. Excluding health care, broader services price pressures accelerated, which is a concerning sign for the Fed. Core goods inflation turned modestly positive following several months of deflation, while OER contribution moderated after an upside surprise in January.

Euro: The disinflationary trend continued in February amid core services reminding us about upside risks to the inflation outlook. Headline inflation fell to 2.6% y/y from 2.8%, while core inflation was much stronger than expected at 3.1% (consensus: 2.9%). Core inflation increased 0.30% m/m s.a., driven by a large uptick in service inflation to 0.39% m/m s.a. Hence, inflation momentum measured as the 3m/3m s.a. annualized rate rose to 2.39%. Despite being just one month with strong core inflation, the print remined us about the key upside risk to our and ECBs inflation forecast from service inflation given the strong labour market, low productivity, and high wage growth.

China: February CPI increased to 0.7% y/y (cons: 0.3%) from -0.8% y/y in January. The positive figures are attributed to a spending boom following the Lunar New Year.

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