Inflation: A tale of two stories - ANZ

Analysts at ANZ point out that inflation figures on either side of the Atlantic tell two very different stories at present.

Key Quotes

“In the US, the PCE deflator rose to 2.1% y/y in February – its highest reading since 2012. Whilst recent weakness in oil prices should push that lower in coming months, the uptick in the core PCE to 1.8% y/y is welcome. It implies gradually firming underlying inflation pressures as the US economy operates at higher levels of resource utilisation.”

“In stark contrast, Euro area headline inflation fell sharply to 1.5% y/y in March, with core dropping to 0.7% y/y. There is absolutely no evidence anywhere of a sustainable pick-up in inflation in the single currency bloc, and chatter of an early end to QE is premature. The ECB's expectation that core inflation will average 1.1% this year is based on full implementation of the QE programme, and at present it is only just above the cycle low of 0.6% y/y seen in March 2015. That’s an indication of how hard it is proving to be to get a sustainable rise in inflation in Europe. The ECB therefore need to let the activity data run “hot” in an effort to close the output gap, which might exert some upward pressure on prices eventually.”