09/21/2021 | Press release | Distributed by Public on 09/21/2021 02:17
Prepared by Gerrit Koester, Jakob Nordeman and Michel Soudan
After having declined in 2020, headline inflation has increased strongly in both the United States and the euro area over recent months (Chart A). Base effects related to the recovery of energy prices from last year's fall have played an important role in this increase ‒ both in the United States and the euro area.
However, the recent increase in headline inflation has been substantially more pronounced in the United States than in the euro area, which is also reflected in development of price levels in the United States and in the euro area. The indices for headline inflation and inflation excluding energy and food stand in the euro area just around 2% higher than before the coronavirus (COVID-19) pandemic (December 2019), while in the United States they stand around 6% higher (Chart B).
Developments in headline inflation over recent months have, especially in the United States, been driven by a relatively small number of items with very high inflation rates - including energy prices. This can be illustrated, for example, by the "trimmed means" of US CPI and euro area HICP inflation, which exclude the items with the highest and the lowest inflation rates (Chart A). Trimmed mean headline inflation increased from January to July 2021 by around 1.0 percentage points for the US CPI and 0.8 percentage points for euro area HICP. By contrast, untrimmed US headline CPI inflation increased by 4.0 percentage points over that period, while in the euro area HICP inflation rose by 1.3 percentage points.
Headline inflation and trimmed means
Index levels for HICP in the euro area and CPI in the United States
While in the United States CPI inflation less food and energy is now significantly higher than before the pandemic, in the euro area HICP inflation excluding energy and food (HICPX) has remained lower than before the pandemic (Chart C).
Contributions to inflation excluding energy and food in the euro area and the United States
Price pressures are more broad-based in the United States than in the euro area (Chart D). While a few items with especially high inflation rates (including energy inflation) played a crucial role in the strong increase in headline inflation over recent months, price pressures in the United States have increased more broadly across the distribution of items included in CPI less food and energy. Zooming in on the distributions of price changes for items included in this index in the United States, the share of items with annual price increases above 4% has increased sharply (to approximately one-third in July 2021), while at the same time the share of items with negative inflation rates has decreased substantially (from around one-third in January to 14% in July). In the euro area, by contrast, the shares of items with very low inflation (below zero) and high inflation (above 4%) have remained relatively stable. The share of items with inflation rates between 2% and 4% increased from around 10% at the beginning of the year to around 30% in July, while the share of items with inflation rates between 0% and 2% decreased by a similar amount but remained the dominant category in the euro area. As a result the share of items in the US core inflation basket with inflation rates above 2% ‒ which can be seen as an indicator for the broadness of price pressures ‒ has increased recently to close to two-thirds from less than half in the year before the pandemic. In the euro area, this share has been much lower and has only very recently increased to around one-third (in July).
Distribution of inflation rates across items included in inflation excluding energy and food
Recent increases in inflation have pushed up the inflation expectations of professional forecasters (Chart E). Compared with the beginning of the year, inflation expectations for 2021 have been revised upwards for the euro area and even more so for the United States (1.2 percentage points for the euro area and 2.0 percentage points for the United States - Chart E, panel a). For 2022 the upward revision has been substantial for the United States but only moderate for the euro area (0.7 percentage points for the United States and 0.3 percentage points for the euro area). In the latest survey by Consensus Economics (August 2021), mean forecasts see US headline CPI inflation reaching 4.1% in 2021 before falling back to 2.9% in 2022. For the euro area, headline inflation is expected to rise to 2.1% in 2021 before falling back to 1.5% in 2022 - a path comparable to that projected in the September ECB staff macroeconomic projections. According to Consensus Economics, while US headline inflation is expected overall to stand quite substantially above pre-crisis levels in 2022, euro area inflation is expected to fall back in 2022 to levels that are only somewhat above those recorded in 2019. At the same time, judging from the range of projections included in the Consensus Economics forecasts, uncertainty about inflation developments in 2022 seems to remain substantially higher in the United States than in the euro area.
Upside surprises in inflation data releases over recent months have been substantially stronger for the United States than for the euro area. Developments in Consensus Economics forecasts at a monthly frequency (Chart E, panel b - starting with forecasts from March 2021) show that inflation developments have been higher than forecast in recent months in the euro area and even more so in the United States. Looking ahead, Consensus Economics forecasts see headline inflation remaining elevated over the coming months, but falling to 2.5% in the United States and to 1.4% in the euro area by July 2022 - bringing inflation back to the levels observed in spring 2021 before the recent strong increases in inflation rates in both regions.
Inflation expectations from Consensus Economics for US headline CPI and euro area headline HICP inflation
Overall, a substantial part of the strong increases in inflation and the upside inflation surprises over recent months in the United States and the euro area can be attributed to special factors that are likely to be of a temporary nature. For a more permanent increase in inflation, price pressures would usually need to become more broad-based (especially in the euro area) and also reflect increasing labour cost pressures. However, there is so far no firm indication of the latter once the effects of changes in the composition of employment and of job retention schemes are taken into account. At the same time, the recovery from the pandemic represents a unique situation with considerable irregularities for inflation developments, which require close monitoring and add to the uncertainty surrounding the inflation outlook.