LONDON (CNN) – The latest inflation figures from the United States, the United Kingdom and the European Union are raising hopes that the worst is over and some relief for struggling households may be in the offing.
Annual inflation in the United States slowed to 6.4% in January, falling for the seventh straight month. In Europe, inflation is at 8.5% after peaking at 10.6% in October. In the UK, which faces a weaker economic outlook than its peers, inflation is also falling: in January annual inflation fell to 10.1% from a recent peak of 11.1% last autumn.
But inflation remains uncomfortably high, often in line with pre-pandemic norms. Even more worryingly, beneath these headlines are signs that the battle against soaring inflation is far from over, raising fears that elevated inflation could seep into parts of the economy where it is difficult to root out.
“The bottom line is that inflation is still a problem,” said Torsten Slok, chief economist at Apollo Global Management. His analysis of recent data, he added, showed price increases could be “persistent”.
One indicator stands out. In the United States, the Federal Reserve Bank of Atlanta publishes a version of the consumer price index that tracks “sticky” prices. It is based on a basket of items whose prices change less frequently, such as B. housing, doctor’s fees and personal care products, and is monitored for signs that high inflation could be staying power.
January’s sticky-price CPI remained at 6.7%y/y, its highest level since 1982, even as flexible-price CPI, which tracks items like groceries and gas, fell sharply.
Economists and the Federal Reserve are also keeping a close eye on service prices. The prices of buying car insurance, going to the cinema or a concert, and going to the hairdresser all increased in January, both month-on-month and on an annual basis. This is worrying given the huge role services play in the US economy.
“What happens to services is going to be very important,” said Ben May, director of macroeconomic research at Oxford Economics.
Two data points arriving on Wednesday and Thursday added to investors’ concerns about inflation. Retail sales rose 3% mom in January, the biggest increase in nearly two years. That’s a problem because getting Americans to spend less is crucial to the Fed’s anti-inflation campaign.
Producer prices for January also came in stronger than expected, indicating ongoing inflationary pressures.
Across the Atlantic
In the European Union and the United Kingdom, the recent collapse in global energy costs is expected to result in a significant fall in inflation later this year. Thanks to aggressive stockpiling, a drop in demand and relatively mild weather this winter, the region has avoided nightmare scenarios of energy shortages that could have supported prices.
As a result, the European Commission lowered its outlook for headline inflation this week. It now forecasts that inflation in the 20 countries using the euro will fall to 5.6% this year and 2.5% in 2024.
However, electricity prices remain well above historical averages, which will continue to weigh on households and businesses for some time to come. And the International Energy Agency has warned that Europe could face energy shortages this year unless demand is reduced further. That could drive prices back up.
“Inflation will lose purchasing power only gradually in the coming quarters,” said EU Economic Commissioner Paolo Gentiloni.
Food prices also continue to rise at an alarming rate, especially as wages cannot keep up with rising costs. In the United States, groceries rose 11.3% last year, while in the UK, food and non-alcoholic beverage prices rose 16.7% annually in January.
In the euro zone, food, alcohol and tobacco prices increased by 14.1% on an annualized basis.
This time inflation has particularly tangled roots. It was spurred by an explosion in demand for goods from people stuck at home during the pandemic and then exacerbated by Russia’s war in Ukraine. But, according to Oxford Economics’ May, there is still some confusion as to what exactly caused the situation to spiral out of control and what policymakers can do to resolve the problem.
That’s one reason central bankers, who have been working hard to tame rising prices, have realized the process could be lengthy.
“You expected that [inflation] will go away quickly and painlessly,” Fed Chair Jerome Powell said earlier this month. “It will take time.”
How much time remains the subject of considerable debate.
“We’re still in this really uncertain zone,” May said. “We know that inflation will end the year lower than it is now, and frankly quite lower, but the speed of the decline will depend on a lot of factors, which are pretty heavy are to be predicted.”