Global Data Pod: Inflation Monitor: Another squeeze, with broader pressures

[MUSIC PLAYING] Welcome to the Global DataPod. I'm Nora Santivani, and joining me today, I have my usual partners in crime, Abial, Reinhardt, and Raphael Bren, again. Welcome both of you. >> Reinhardt. >> Reinhardt. So this is our usual monthly inflation discussion. And it comes at a very interesting time when we are seeing very large swings in energy prices, following the US midterm elections. But maybe before we go there, I'll just take a step back and talk a bit about the main takeaways from what we saw through the September inflation reports. Globally, basically, the main message here has been that a second inflation squeeze is underway in September. We had a large 0.6% month-on-month gain in headline consumer prices. And that lifted the three-month momentum close to 5% annualized, so a pretty sharp pickup after that mid-year moderation in inflation. And energy was the principal driver of that increase. I think the other important message is that the inflation impulse has been broadening. But we have been talking on this call for many months now about court goods inflation picking up. And that is well underway on top of that. We are also seeing food inflation forming. And actually, services inflation, too, looks to have picked up rather than providing an offset to court goods prices as it had done earlier. So pretty much all components of inflation are confirmed in September. And on core inflation, we saw the momentum they're stepping up to 3.3%. So that has been also moving higher. So there's a sense that there is a kind of a common force behind that broadening. I mentioned court goods inflation. That has accelerated to its fastest pace since the middle of 2023. And importantly, the US is now looks to be joining in what had been previously more of a rest of the world story. And we can point to a number of factors there as we have done on this call, supply chain pressures, shipping costs, freight rates moving up, petrol chemical costs, the AI link rise in memory and tech prices and the list goes on. I think on services inflation, the jury is still out as to whether we see continued pickup, whether we have seen the trough there, will things just kind of stay sticky and elevated or will they actually be picking up? I think that remains largely a DM story for now. We're not seeing it so much in the emerging markets, but it certainly challenges the idea that continued services disinflation would offset the pickup in goods inflation. Now, of course, an important development since we published that September inflation monitor has been on energy prices this week, past few days, really, a brand crude has fallen sharply. We're down something like 15% on the week. Although prices are still well above pre-conflict levels, I think that potentially take some of the edge off for the energy squeeze in coming months that I think we had been fearing would actually intensify. And at the same time, food inflation is becoming less comfortable. So food inflation while still low by historical standards is now picking up quite sharply, largely an EM, not so much in DM. It's mainly an EM agent. Last time, so the two regions that are most exposed to El Nino, but I think an important question there is whether that will broaden and intensify and could the drop in energy prices provide an offset. So lots going on here, I'm gonna stop talking. And turn to you two. I guess we should start with just your latest prints in your respective regions for September in the US and for the year area. We actually already have October flash release. So I don't know, I'll be able to want to start us off. September should have further pick up and core inflation than it seemed fairly broad-based. What are your thoughts here as you're looking at that data? - Yeah, absolutely, you put it well. It was broad-based, it was not an encouraging report and the early signal from business surveys too for the month of October is not terribly encouraging. And so if you look back a couple of months all the way to August, there was a pretty firm core of CPI inflation report for August and people looked at it including us and there was one component that was particularly strong within that, we dismissed it a little bit but September came around and it was much more broad-based. It was both in services and then it was in goods. It was both in housing and super-core services. So it was really quite across the board and something that leaps out there is within goods and you've been noting this Nora in your recent publications just a degree to which goods inflation has picked up. I think we expected to pick up some given what we know about the technology story, given what we know about energy and supply chains and that's happening. So even if you've had the inflation impulse from tariffs faked over the course of this year, then the last or goods inflation has turned around. And if you look at the business surveys, we've had in the United States that are out of October, we just got another round of surveys this week. All of those are at, depending upon which measure you look at, they're near the peak for this cycle, maybe they've moved up or down a little bit but all of those really look pretty firm. So I think the near-term outlook for goods inflation will obviously have to see what happens to energy prices. As you noted, they're down sharply over the last few days but I have to see what happens there but in the near-term, it looks like we'll probably continue to see fairly firm goods inflation. And then as two in services, super-core services is something we track that has in the core PC measure and has accelerated some. We've gradually seen the over-year-go rate of those increase. So in the near-term, it looks to be a fairly firm inflation picture. I'm not terribly encouraging signal also from what we're seeing in the business surveys. Yeah, as you noted, quite firm, quite broad base. I mean, what's the narrative in your mind? So without taking it apart into all its individual components, is this a has-through of the energy shock into broader inflation? Is this a firm above trend growth story that is pushing inflation higher? How are you reading this firmness in inflation? Because it sounds like there aren't any real special factors here that we should discount, right? Like it sounds like it's quite broad-based one could continue. So what's your story behind this? Yeah, so I mean, a couple of different things, right? So in the good space, we're very likely seeing-- we are seeing very clear pastor in the technology area. The memory price spike that we got at the first half of the year is really continuing to translate into more rapid tech price inflation, energy is, of course, harder-- energy and supply chains are, of course, harder to parse out and linked to individual products. But we would expect that we would be seeing some pastor when you just look back at historical relationships between the energy prices and core inflation. We should be seeing some pastor, also, from the higher cost of transport. We've certainly seen transportation costs go up at the producer level, trucking transportation, those types of things. So I think that's part of it. And you can just do it too in the qualitative comments and business surveys. Many of those comments are people referring to shortages of goods, of transportation costs, of supply chain, rejiggering, et cetera. And then in services, labor markets are tightening a little bit. Wage disinflation is continuing. But total compensation growth looks to have perhaps already leveled off or mostly leveled off. And so that is probably stabilizing things some in the services area, as well. And I'll note one final thing is that energy prices do also contribute to transportation-- sorry, to services cost, via transportation. We're seeing that very clearly in the airline category. Yeah, and I think it all, kind of, in my mind, paints a picture of quite firm pricing power as we call it in economists' lingo. So this sort of willingness and ability to pass on higher input costs to final prices. So that's definitely one to watch and something that could become concerning. If it continues, how about on the euro area side, Raphael, things there to look quite firm. We had an uptick in cornflation. What was it? 2.6% headline, obviously, even higher. You've been noting quite limited pass-through from higher energy prices into-- broader inflation in the URI area, is that still the case with the latest release, or are you becoming a little bit more concerned here about the kind of stickiness of inflation and potentially things even firming? So the first thing to say that we don't have details, we have data for October, but we basically have the main category, so it's hard to basically just entangle what's going on in terms of the dynamic specific dynamics, but I'd say that it's probably limited to pass through from energy to core steel, and the reason why I'm saying this is that if you take the October print basically 0.22 in terms of core prices is of course above where we would like to see if you think in terms of the 2% target, it's something which is annualized closer to 2.7 but it's at the same time the average base that we've seen pretty much throughout the year, so it's not showing something which is a pickup in momentum in terms of this core monthly price increases. Now when you look at the details available to basically have core goods, you have core services, core goods had a specific thing over the summer because you had some increase, one of increases in medicine prices in Germany that was a government decision, and that was pretty significant. So you basically have things that are a bit more normal now as we moved into September and October in terms of the core price gains, so it feels that what was happening during the summer was effectively one of. And what we see at the same time is a pickup, this we can see in terms of services prices, in terms of that momentum, and this is where we thought we should see the first signs of the path through of higher energy prices to core inflation by especially transport services, something that I've been mentioned before. That is for the moment something that is fairly limited, but maybe this is early stages, when we had done the analysis, we published some notes around March saying that it could take six months to see some signs, especially in services prices and through transport services, effectively what we may be starting to see is that. I think it's important to be in mind that we still point to something that is a fairly limited path through, and then you need to think about the wage inflation channel and Abial Mansion for the US some numbers what we can say and we have a sense of forward looking data with the ECB negotiated price pay data is effectively that you don't see a pickup in these data as we go into. The first half of 2027 so it feels that that wage inflation channel is not reflecting the the higher prices at the moment, so we take confidence from that. Alright so maybe we can talk just a bit on food inflation, I know it's not generally a huge driver for developed markets, but I think because of El Nino it's worth talking about we also published our second edition of the El Nino tracker and the key message from there is that El Nino is approaching our historic peak in its very strong categorizes a very strong El Nino. So really possibly the strongest one since the 1950s it is expected to remain strong to very strong through March 2027 and then remember the impact of this to both agricultural production and inflation typically comes with some lags of I don't know six months up to 12 months so you know much of the macro impact has yet to be seen. I think it's going to become more visible through the early part of 2027 in some emerging markets we are now starting to see a clear upward pressure on food inflation so far is just the several handful of countries that are very strongly affected by Peru was one of them. But in terms of impact on food inflation well both globally and in the US and your area how concerned should we be about this is this largely an EM story or is this a potentially meaningful inflation impulse for you I know that in past research I think both of you have noted that food prices in your regions typically respond more to either local weather shocks or energy shocks. Right so things like diesel and fertilizers rather than El Nino itself but I wanted to sort of get your latest thoughts given just how intense this El Nino is shaping up to be. Yeah maybe I'll start for the US you're right then past in some past research we haven't found much of a relationship and I think nor you two had run some recent research showing not much of a relationship between now El Nino and food prices in the United States that being said. It's still something we are looking at actively there was a for example the San Francisco Fed had a report this week which did a slightly different type of analysis and came to the conclusion that based upon the projected El Nino through next year you could have core PC inflation actually being boosted well over half a percent. With a lot of the impact coming in the second half of of next year as I said it's something we're looking at it's you don't get these events too often so it's a little tricky to disentangle the El Nino component from everything else it could be happening. So it's something you know that would be in both food as I know I mentioned core before it'll be buzzing sorry that actually be buzzing food and they have that research did show actually some past or interestingly into core through some non food components there so something we're definitely looking at and the effects could be yes it could be delayed you know well until next year. And I think typically what we see is that the impact on food prices get amplified when we also have a energy shock interacting with the weather shock with El Nino so I think that that angle is probably quite interesting to bring in here. Rafael how about you I know you've done more work on this and it's possibly a bit more relevant for for your what are you seeing there well the the starting point when we looked into that was to try to assess whether Nino could have a significant impact on to your area inflation and effectively from prior episodes we didn't find any significant effect now what we're talking about is potentially. A El Nino impact that could be stronger this year so you can ask the question whether in the past the the episodes were not strong enough but generally we had found that whatever matters for food inflation is more local weather events rather than something which is happening quite far away from the year area. And as I'm looking at the data now and you basically put on to the table the idea that when you have severe weather events combined with stress in terms of energy prices this is where we could feel the pressure more significantly at least I can say that in terms of the year area when when we have a two tense increase to one six county which is where food price inflation is that feels fairly low. That is not high by history called standards that is fairly low because we know that we have some effects in terms of the severe weather we talked about Nino but there is this summer we had some pretty severe weather with a very hot weather very little rain region and we have the energy prices and despite that we're talking about something that feels fairly low so it does feel as of now we know that lags can be long. They can be nine month to year but as of now we haven't seen any large significant pressure coming from the channels we are discussing at the moment. Yeah okay I think certainly want to watch and I think if this this impulse may take a while to build so I wouldn't be surprised if we're here three to six months from now maybe talking about it again or still but for what it's worth an emerging market three month annualized rate on food inflation is now up to about 6% so that's a very strong pick up in recent months but again it's coming off from very low level so. Alright so I think we should then shift to talking a bit about policy implications how does the latest inflation dynamic compare with central bank forecast are we on track are we are we right sort of running above I guess with the energy move. It felt like previously like let's say a month ago we were getting quite concerned about upside risk coming from higher oil prices and natural gas prices in Europe fairly in particular for your region and you were kind of in the process of revising inflation higher as a result of that. I guess now with energy coming off maybe some of that upside risk has been potentially taken out. But where do we stand compared to sort of latest central bank forecasts at the moment? So if I may follow because you've mentioned the year-a-year forecasts. So yeah, we did feel that there was a bit of upside pressure in terms of higher energy prices. And obviously yesterday we've seen a move down in energy prices. We did push up the inflation forecast on balance. Not something very strong, but effectively we thought the latest energy prices warranted us to revise the assumptions in terms of energy prices, the path we do call. What we left with is effectively a core inflation path that is slightly revised up. What we're talking about is effectively a peak of 2.8 at the start of next year heading towards 2.4 at the end of next year, which is very much aligned with the ECB. So when you think in terms of the policy angle, I think we should have in mind that the ECB has been a central bank so far that has stressed the idea of a potential strong pathway from energy prices to core inflation and with some willingness to act on the back of that. And certainly with an inflation forecast, because they've published their baseline, but also alternative scenarios where they could see some potential pressure, additional pressure if energy prices were higher. And I think what we end up with is something relative to a forecast that feels comfortable in terms of the core for the ECB, which is too high. So one in December, one in March. There was some pressure from energy prices to basically think that the ECB would have to potentially do more than that, but I think after the move that we've seen recently, we're pretty comfortable with the call at the moment, with the next year high, effectively. Perfect. ABL, how about for the US? Yeah. So the inflation numbers for this year probably remain largely close to Fed expectations. After you, there's one small technical thing, so the last time the Fed did their summary of economic projections, they were operating with a PC measure that was prior to some methodological revisions. We think their forecast probably did not yet take into account those revisions. Once you try to wrap that all together, their projections for this year are probably pretty in line with where we think core PC inflation is going to come in, which is about 3.2%, Q4, Q4. It really starts to come down more, I think, let's to what's going to happen for the remainder of this year than what's going to be going on in the early part of next year. For next year, the Fed has 2.5%, Q4, Q4, core inflation, more somewhat higher. We are somewhat higher than that, about 2.7. If that starts to, if that remains quite hot through the first half of next year, that could challenge some of our call that we'll see the last hike in December. It will be tricky, I think, certainly Fed speakers, even as they face high inflation, have pointed out reasons why they think that it's temporary, why it's more supply shock driven, whether that be the conflict in the Middle East or really more the demand driven inflation of the tech boom. If they don't see that starting to fade a bit, as we start, as we go through the first half of next year, that could precipitate more hikes. Yeah, perfect. Okay, yeah, I think that's pretty much the broader global story as well. So, sticky inflation still above central bank targets, sort of unclear how much of a relief we're going to get from lower energy prices, but just to reiterate that our house call from the commodity stimulus for oil to be moving lower into the early part of next year. So, with that in mind, we should see the energy impulse to inflation, turning negative at some point. Obviously, food inflation is an upside risk, and on core, things just look sticky for now, at least for the near term, with those pressures on goods prices, I think, continuing and services is a bit of a wild card. With NEM, there's just a lot of differentiation, so I'm not even going to attempt to go through low-by-low, but suffice to say that some central banks are still in a position where they are cutting rates and responding to quite soft domestic demand, whereas others are a little bit more nervous about these shocks getting embedded in higher expectations than therefore having to hike. That's pretty much a mixed bag there, and certainly a lot more varied than the DM, which is very much everybody hiking, but hikes remain fairly gradual for now. I think that's been a key message that we're not seeing a very aggressive hiking cycle for now. Okay, so why don't we end it there? Thanks to both of you for joining, and thank you to our listeners for tuning into the global data pod. We hope you can join us next month. This communication is provided for information purposes only. Please refer to JP Morgan Research Reports related to its content for more information, including important disclosures. 2026 JP Morgan Chase & Company All Rights Reserved. This episode was recorded on November 5, 2026.