Global inflation: Watch tariff uncertainty blurs the outlook

Overview: Underlying inflation continues to moderate both in the euro area and in the US. Inflation pressures ease gradually with weak goods inflation and in the case of the US, a more balanced job market. In the euro zone, wage growth remains elevated but is also now cooling. Markets’ inflation expectations have remained relatively steady despite the high trade policy uncertainty. Oil prices have moderated over past weeks, but natural gas prices in Europe have edged higher.

Inflation expectations: Market-based inflation expectations have remained relatively steady and close to the 2% target despite the trade uncertainty. US consumers’ short-term inflation expectations rose sharply in the latest University of Michigan survey, although alternative measures remain well-behaved.

US: January CPI surprised sharply to the topside as headline CPI grew by 0.5% m/m SA (cons. +0.3%, Dec +0.4%) and core inflation accelerated to 0.4% m/m SA (cons. +0.3%, Dec. +0.2%). Larger annual price increases at the start of the year have caused similar volatility to January readings over past years as well, but the upside surprise was still very broad-based across price categories. Especially car insurance and egg prices recorded unusually large jumps, but also broad nonhousing services inflation accelerated sharply. We will evaluate our dovish Fed view of four rate cuts in 2025 over coming days.

Euro: Euro area inflation rose to 2.5% y/y (0.3% m/m s.a.) in January, slightly above expectations, and up from 2.4% in December, driven by sharply higher energy costs. Core inflation remained stable at 2.7%, with services inflation persistently high at 3.9% y/y. The monthly price increase in services inflation was around 0.30% m/m s.a., so slightly to the high side. However, as many services prices are only adjusted in January, January’s data offers modest relief to the ECB, as the ongoing softer momentum in underlying inflation continued. The figures align with ECB President Lagarde’s view that inflation may fluctuate due to energy prices while slowing toward the 2% target as underlying inflation continues to ease.

China: January CPI increased from 0.1% to 0.5% y/y while core CPI rose to 0.6% y/y from 0.4% y/y. PPI increased was flat at -2.3% y/y.

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