Global Inflation Watch – Inflation Keeps Surprising to the Upside

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Overview: A combo of renewed increases in commodity prices, very tight labour markets and high consumer inflation expectations continues to keep upward pressure on inflation intact. On a positive note, electricity prices in Europe have come down. Freight rates are still at high levels and delivery times very long. We look for US core inflation to rise further and peak at 6.6% in March 2022 before easing to around 4.6% by end-2022. We expect euro core inflation to peak now and fall below 2% in Q4.

Inflation expectations: Market-based long-term inflation expectations still move sideways, but US household long-term inflation expectations are at a 10-year high. Euro household price expectations for next 12 months stayed elevated in December.

US: CPI inflation rose to 7.5% y/y in December and once again the increase was higher than anticipated, implying an even higher pressure on the Fed to tighten sooner and faster (markets are now pricing in six rate hikes from the Fed in 2022). Energy and food prices (and usual suspects like used car prices) are explaining a lot but price increases are broad-based. Around 50% of small businesses expect to hike output prices within three months and long-term consumer inflation expectations are now 3.1% y/y, which is indeed in the upper end of what the Fed can tolerate, in our view.

Euro: In contrast to expectations, HICP inflation rose to yet another all-time high of 5.1% in January, as soaring food prices and strengthening core inflation pressures more than made up for German VAT base effects falling out of the equation. ‘Saved-up’ price increases by companies likely also played a role at the turn of the year, leaving core inflation elevated at 2.3%. The continued inflation upside surprises were an important trigger for the communication shift from ECB at the February meeting and with inflation risks still seen on the upside, we now expect two 25bp hikes (read more in ECB Review: New call – ECB to hike in Dec22 and Mar23, 3 February).

China: Chinese PPI inflation dropped from 12.5% to 10.3%% in December. We look for a further moderation in coming months but recent increases in commodity prices will moderate the decline. CPI is running at 1.5% y/y, clearly below the 3% target.

Full report in PDF.