The marked discrepancy between consumer inflation (CPI, its abbreviation in English) in the United States and Europe, which was demonstrated last week, should remain in 2023. The projection is laid out in a report by Capital Economics. In October, the annual CPI in the US came in at 7.7% (up from 8.2% in September), while in the eurozone it came in at 10.6% (up from 9.9% in the previous month).
According to the economic research firm, although core inflation appears to be set to fall in all developed markets, the energy crisis and tighter labor markets in Europe are among the reasons why the continent’s slower pace of inflation decline.
The company pays more attention to the behavior of underlying inflation. In the Eurozone, the index excluding energy and food was still strong in October, reaching 5%, with inflation in all major product groups near or at record levels. On the other hand, the assessment indicates that core inflation in the US (6.3%) has already peaked.
According to Simon McAdam, chief economist at Capital Economics, there are three reasons why core inflation tends to decline more slowly in Europe than in the United States. The first is that although commodity shortages have eased globally, they are still severe in many sectors in Europe, suggesting that pressures on commodity prices will remain more resilient in the coming months.
“According to the latest surveys, shortages still afflict 54% of UK manufacturing firms, and almost all manufacturing sectors in the eurozone are now experiencing widespread shortages now more than at any time before the pandemic,” McAdam said in the report.
“Besides much higher energy prices, more widespread scarcity may explain why pressures on consumer prices are much stronger in Europe than in the United States,” he explained.
The second reason is that labor markets appear to be much tighter on the European continent than in the United States. Hourly earnings growth has already slowed in the US, while growth in regular wages has rebounded in the UK. In the Eurozone, Indeed’s salary tracker reports that salary growth offered to new hires has risen from less than 2% annually to more than 5%. % so far this year.
According to him, it is true that vacancy rates and corporate hiring intentions have declined both in the United States and in Europe. But the worker shortage appears to be worse of the latter, meaning that employers in the eurozone and the UK may be more reluctant than their US counterparts to cut back hiring or lay off workers when economies weaken in 2023.
The third factor is that there are a number of quibbles in the US CPI data that the UK and the Eurozone do not share, such as health insurance and used car prices, for example.
“The most important difference between the United States and Europe is that rents are the main driver of inflation in the United States, but they hardly affect Europe. Therefore, given that rent measures taken by the private sector in due time have weakened sharply in the United States, they should This would be a major drawback to core inflation in that country which Europe would not replicate.
As a result, Capital Economics believes that core inflation in Europe may decline in 2023, as it will in the US, but this should happen only at the end of next year – for the UK this will not happen soon. As of 2024.
“High core inflation in Europe is one reason why we expect the Bank of England and European Central Bank to move into rate cuts later than the Federal Reserve, which we believe will start cutting rates as early as the third quarter of the year. What’s to come He prophesied.
