Underlying price pressures continue to mount in most major developed economies despite recent declines in headline inflation, indicating that central banks will need to continue to tighten policy in the months ahead.
Core inflation – which excludes changes in food and energy prices, and is seen by tariff officials as a better measure of lingering price pressures – is accelerating in many parts of the world, according to an analysis of official statistics from the Financial Times.
Base rates were still up in November in the majority of the 33 countries tracked by the FT and remain well above the 2% inflation level targeted by most central bankers.
The proportion of countries where core inflation is rising has started to decline in recent months, but is still far more widespread than headline inflation. Only a third of the countries saw their key rates increase between October and November.
“There’s still potential for a lot of pain to come,” said Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown. “Stubbornly high prices continue to cause serious headaches for economies.”
Services inflation, another measure of the stickiness of pricing pressures, remains near multi-decade highs in several major economies, including the UK, the eurozone and the US.
Policymakers have raised interest rates aggressively this year in response to soaring headline inflation measures, but have recently begun to scale back the magnitude of the hikes.
Last week, the Federal Reserve, European Central Bank and Bank of England all opted to change their inflation-fighting strategy from a recent 0.75 percentage point to half a point, in response to the apparent spike in headline inflation in many countries.
Christine Lagarde, President of the ECB, said monetary tightening in the eurozone “still has a way to go” and rate setters plan to continue raising borrowing costs in 50 basis point increments. base in the coming months.
Lagarde also acknowledged that underlying price pressures had strengthened and would “persist for some time” – a message that was echoed by Fed Chairman Jay Powell and BoE Governor Andrew Bailey.
Soaring energy and goods prices – a consequence of the war in Ukraine and severe supply chain disruptions during the pandemic – were behind the initial spike.
However, rising costs have since become widespread, with high inflation reported in pockets of the economy that for many years proved immune to price pressures. Wage growth, which has been subdued in most major global economies since the global financial crisis, has also taken off, notably in the United States.
With commodity prices now stabilizing, headline inflation has fallen sharply in several economies, including the US, UK and Eurozone.
Core inflation measures have not kept pace. The most widely used indicator of long-term price pressures, core inflation, remains at a record high of 5% in the eurozone.
Silvia Ardagna, chief economist for Europe at Barclays Bank, said ECB policymakers would be “worried that we see no loosening of inflation dynamics at the core level”.
In the United States, services inflation is still at its highest level in 40 years, despite a two percentage point drop in headline inflation since the summer.
“Services inflation will be crucial in determining the path of policy rates,” said Ben May, director of global macroeconomic research at Oxford Economics.
Last week, Fed policymakers acknowledged that core inflation would prove more sticky than expected, revising their estimate for next year up to 3.5% from 3.1% expected in September. .
Services inflation in the UK also remained elevated, remaining at its highest rate in 20 years in November, despite the headline rate falling to 10.7% from 11.1% in October. The BoE said the persistence of services inflation “warrants a new aggressive monetary policy response.”
“Central banks in developed markets still have work to do,” said Jennifer McKeown, chief economist at Capital Economics.
Streeter said: “Inflation may have peaked, but that doesn’t necessarily mean it’s a smooth ride from here.”