Global Daily – Core inflation diverges

by: Aline Schuiling , Bill Diviney

Euro Macro: Core inflation moves lower – Preliminary inflation data from Germany, Italy and Spain suggest that eurozone core inflation declined in April. Italy was the only one of the three member states that already published detailed inflation numbers. They showed that the harmonized core inflation rate declined to 0.2% in April, down from 0.7% in March. Meanwhile, headline inflation in Italy fell by 0.3 percentage points, to 0.6% yoy in April. In Germany detailed data was published for the main regions. They also clearly signal that core inflation moved lower, particularly the inflation rate of package holidays, which dropped by around 4 percentage point in the main regions. Finally, in Spain the statistical bureau mentioned that the decline in headline inflation (to 1.1%, down from 1.2% in March) was due to package holidays and gas. We think the drop in the inflation rate of package holidays is largely due to the early timing of Easter, which created a strong negative base effect in April. Therefore, the decline should be largely unwound in May. Having said that, underlying inflationary pressures in the eurozone remain weak and should keep core inflation close to 1% in the coming months. Indeed, the key driver of core inflation –wage growth – remains subdued given that there is still slack in the labour market. Our base line scenario is that core inflation will take time to embark on a clear upward trend. We expect it to rise slowly in the second half of the year, but to remain well below the ECB’s target throughout 2018 and 2019. (Aline Schuiling)

US Macro: Fed will draw comfort from firmer inflation – Core PCE inflation, the Fed’s preferred measure, rose 0.2% mom in March, picking up to 1.9% yoy – the highest this measure has been since January 2017 (from 1.6% yoy in February). This came as the unusual fall in mobile phone tariffs in March last year dropped out of annual inflation figure. The monthly inflation outturn was less dramatic, but there has been a notable strengthening in momentum in recent months, with core PCE inflation picking up to 2.5% 3m/3m saar in March. However, the rise in inflation has mostly been driven by core goods – for instance apparel – which is determined by global, rather than domestic factors. Indeed, we continue to see little sign of the tight labour market exerting upward pressure on core services inflation. With investment shifting up to a higher gear, meanwhile, we expect stronger productivity growth to dampen the pass-through of higher wage growth to inflation. As such, although the Fed will draw comfort from the recovery in inflation, we believe the hawkish shift on the FOMC is mostly due to the upside risks to growth on the back of tax cuts and fiscal stimulus, rather than fears of an imminent surge in inflation. We recently revised our Fed call, and now expect three more hikes this year at each press conference meeting, while futures markets continue to price in just two further hikes. (Bill Diviney)