- US consumer prices continued falling, on lower energy prices, but core inflation firmed
- Inflation will likely start to pick up towards the 2% target later in the year, to reach it in 2016
- Eurozone data support our above-consensus growth outlook, while sentiment in Greece rises
US consumer prices continue falling…
The headline consumer price index declined by -0.7% mom in January, following a 0.4% decline the previous month. This was the biggest decline since October 2009. As expected lower oil prices continue to weigh heavily on inflation. Indeed, we saw declining energy prices (-9.7% mom), pushed down mainly by gasoline prices which plummeted (18.7% mom). The drops in energy prices pushed annual inflation into negative territory. It came in at -0.1% yoy in January.
…but core inflation firms
Meanwhile core inflation, which excludes energy and food, rose 0.2% mom, following an upwardly revised 0.1% rise in December. This left annual core inflation stable at 1.6% yoy, leaving it on the broadly sideways trend we have seen in recent months. Shelter / rental costs was the main contributor to the rise in core inflation. Transportation also picked up in January, mainly due to motor vehicle insurance. While shelter (rental) costs have been slowly picking up since the recession ended, core services and core goods have been slowing.
Core inflation set to move sideways, firm later in the year
We expect to see some further decline in headline inflation and flattish (to slightly lower) annual core inflation in the next few months. We think that core inflation will start to move towards the Fed’s 2% target later in the year, reaching it during 2016. We expect the upward pressure on shelter costs to continue for some time. We think that growth in rental construction will be slow and it may take around a year for rental prices to ease. A gradual rise in wage growth will also eventually put upward pressure on inflation. However, we expect some further decline in core goods prices, in the next few months. This reflects that import prices are under pressure from a stronger dollar, lower oil prices and weak global price pressures.
We expect first hike in June, but it might be a little later
We expect the Fed to hike its policy rate for the first time in June. However, there is a risk that import prices have a bigger downward effect on core inflation in the coming months than we currently expect. If this risk materialises, we could see the Fed delay the rate hike slightly, to later this year.
Eurozone sentiment improves, even in Greece
The EC’s economic sentiment indicator increased to 102.1 in February, up from 101.4 in January. Retail confidence and consumer confidence rose particularly sharply. The decline in oil prices, and its positive impact on real income, is likely an important factor behind these rises, but improving labour market conditions contributed too. Indeed the details of consumer sentiment show that consumers’ expectations about unemployment improved markedly, as well as their view on their future financial situation. At the individual country level, a striking element was that sentiment in Greece picked up in February (to 98.2 from 95.3 in January) after it dropped in both December and January. This might have been due to the relatively constructive approach of the Syriza government in its negotiations with Europe and the expectation that a longer-term deal between Greece and Europe is within reach.
Money supply growth accelerates
Meanwhile, money supply and lending data provided more support to our above-consensus growth forecast for the eurozone. Money supply growth picked up further in the eurozone in January. Annual growth in M3 increased to 4.1%, up from 3.8% in December. Real M1 growth, which is a good leading indicator for GDP growth, accelerated to 9.6% from 8.1%. Moreover annual growth in loans to non-financial companies rose to -0.9% from -1-1%, while growth in loans to households increased to 0.9% from 0.8%.