Inflation in US slows, but some spending unaffected by high rates

This week investors breathed a sigh of relief as US core inflation resumed its downward trend. The Core Personal Consumption Expenditure Price Index is a significant measure of US inflation as it is closely watched by the Federal Reserve. After appearing stubbornly high at the previous two readings, the small move down this month has been welcomed by those concerned that central bank rate cuts were in danger of being delayed. We’ve also seen headline CPI inflation in Europe decline due to disinflation in France and Germany.

However, there are signs that controlling inflation fully may be difficult. US Core PCE is down over one year, but the monthly reading picked up. Meanwhile goods prices are falling but services inflation is still rising strongly on both sides of the Atlantic. In the UK, for example, Halfords is feeling the effect of less spending on goods while IAG is the latest airline to cash-in on the post-Covid travel boom. As pointed out by Bank of England member Catherine Mann, a lot of inflationary spending is coming from wealthy consumers who are not affected by higher borrowing costs.

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