Inflation falling, but core rates too sticky for comfort

While headline CPI prints have been encouraging in recent months, policymakers will be nervous about the stickiness of core inflation. Average headline inflation in major advanced economies had dropped from 8.5% late last year to below 6% in April, and timely May releases from the US and euro-zone suggest that it fell to a 20-month low of 5% last month. However, look under the hood and a more concerning picture emerges. Declines in headline rates primarily reflect plunging energy inflation and favourable base effects. Meanwhile, food inflation – over which central banks have little influence – is still running at double-digit rates in Europe. There had been some positive signs that core goods inflation had decisively turned a corner. But the renewed pick-up in the US and UK will give central banks pause for thought. Most concerning of all has been the resilience of core services inflation, which is now higher than the average headline rate. With underlying sources of inflation not abating as quickly as central banks would like, they are likely to deliver a couple more rate hikes in the months ahead, even if some take a pause along the way.