Chart of the Week: The last mile is the hardest for US inflation

US inflation accelerated to 3.5% on an annual basis in March, up from 3.1% the previous month. The increase, the third consecutive strong reading, has been driven mainly by energy and shelter prices. To avoid the distorting influence of base effects and volatile components in the CPI basket, we gauge the evolution of underlying price pressures in the economy by looking at percentage changes in seasonally-adjusted core CPI on a three-month annualised basis, often called ‘core inflation momentum’. This measure suggests that price pressures show no signs of abatement at present — in fact, rather the opposite. The reason for this is that the US economy, and in particular the services sector, continue to be very strong, against a backdrop of expansionary fiscal policy and US consumers’ willingness to dip into their pandemic savings. This contrasts with the picture in the euro area and the UK, where domestic demand is much weaker, facilitating the convergence of inflation back to the 2% target. Markets have already taken off the table the possibility of the US Federal Reserve starting to cut rates at its June meeting, postponing these expectations until September. Given the divergent inflation profiles, we should see the European Central Bank and the Bank of England starting their rate-cutting cycle before the Fed, conditional on the absence of any significant supply shock which would force all central banks to reassess the rates outlook. This is a risk which certainly should not be overlooked, especially given the events that we have seen recently in the Middle East.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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