Inflation shows signs of deceleration, but long-term outlook remains unclear
While inflation may be slowing down, the path back to the 2% target could still be bumpy, according to BMO Economics’ latest Inflation Monitor.
The report highlights several key developments that could impact yearly price growth, including the Fed's preferred inflation gauge, which showed core PCE prices rising 0.3% in March for a second straight month, and the employment cost index, which rose 1.2% in Q1.
The Conference Board's consumer confidence index fell in April, but inflation expectations remained high. The latest ISM manufacturing survey also showed that factories continued to contract in April but at a slower pace. Prices paid, however, jumped, pointing to a step-up in input costs.
BMO's leading inflation index is pointing towards a further moderation in headline inflation, but the report notes that after a blip in gas prices in April, relief could be seen in May. Meanwhile, average hourly earnings growth in Canada fell to 3.3% year over year, while the timelier LFS report showed wage growth remained elevated at above 5% for the past couple of months.
Inflation in Europe varied, with Germany's inflation easing to 7.6% on a yearly basis in April from 7.8% in the prior month, while inflation accelerated in France and Spain. The Euro Area's inflation figures are expected to stay elevated, setting up another ECB rate hike on May 4. Australia's CPI inflation also slowed to 6.3% in March from 6.8% in the prior month, but this softer-than-expected inflation rate may not keep the RBA from hiking on May 2.
Despite some positive signs of inflation slowing down, BMO economist Priscilla Thiagamoorthy warns that achieving the 2% target won't be easy. The report urges investors to stay vigilant and brace for a potentially bumpy ride. With several economic indicators pointing towards continued inflationary pressure, investors should be prepared for uncertainty in the markets.
