Core Inflation Gauges Are Falling in US and Euro Zone

What is the Core Inflation?

Core inflation is a way to measure how the prices of goods and services change over time, but it focuses only on certain items and excludes others. It leaves out food and energy prices because they tend to go up and down a lot and can make the inflation rate look more erratic. Core inflation is usually figured out using something called the consumer price index (CPI), which tracks the prices of things people commonly buy.

Another way to measure core inflation is by using the core personal consumption expenditures (PCE) index, which shows how prices are changing for things people in the U.S. buy. Both of these methods help us understand how much prices are generally going up in the economy over the long term, and core inflation is a key tool for figuring that out.

Core Inflation Gauges Are Falling in US and Euro Zone

Central banks worldwide are closely monitoring core inflation rates as they begin to show signs of deceleration. In the United States, the core inflation measure, which excludes food and energy prices, may have dipped almost 4% in August, marking the first time in nearly two years.

In parallel, the Eurozone is experiencing a slowdown in its annual gauge of underlying price growth, which is expected to have fallen to 4.8% in September, marking a 12-month low. This synchronized reduction in core inflation could offer some relief to policymakers on both sides of the Atlantic.

Policymakers Seek Comfort in Core Inflation Slowdown

Policymakers in the United States and the Eurozone are likely to find solace in the recent slowdown of key underlying consumer price growth indicators. In the US, the annual core metric, excluding food and energy, has potentially dipped below 4%, a level not seen in nearly two years, offering comfort to the Federal Reserve.

Meanwhile, the Eurozone is witnessing its annual gauge of underlying price growth slowing down to 4.8% in September, marking a 12-month low. This reassuring data comes after both central banks hinted at potential monetary tightening pauses, shifting their focus to maintaining high interest rates to combat inflation.

Caution Persists Amidst Crude Oil Price Surge

Despite the encouraging slowdown in core inflation, caution remains, primarily due to the surging crude oil prices approaching $100 per barrel. The recent uptick in energy costs has already started to impact the overall personal consumption expenditures price index, a key indicator favored by the Federal Reserve.

This index is expected to show one of the strongest readings this year, further highlighting the impact of rising energy prices. Additionally, headline inflation in the Eurozone is likely to have weakened significantly, dropping to 4.5%, a two-year low.

Upcoming Events and Economic Data

In the coming days, key economic events and data releases are expected to shape market sentiment. In the United States, the Personal Consumption Expenditures (PCE) report is anticipated to be the last government figures released before a potential government shutdown starting on October 1.

Other critical data points include new-home sales, consumer sentiment, durable goods orders, and GDP estimates. Federal Reserve Chair Jerome Powell is set to host a town hall with educators, while various Fed officials will participate in separate events.

In Canada, GDP data for July will be closely watched after preliminary data indicated a stagnant economy that month, supporting the central bank's decision to maintain a steady 5% interest rate. Labor market data, including payroll and job vacancy figures, are also expected to provide insights into wage growth trends and labor market conditions.