PriceStats Analysis: Inflation Improves, but Don’t Celebrate Yet

A look at quarterly measures of inflation, based on prices of millions of items sold by online retailers, to help investors anticipate and evaluate the impact of inflation.

Developed Markets: Peak Inflation Remains in Play

Overall inflation readings finally started to improve in Q4 after reaching multi-decade highs across both developed and emerging markets. Falling energy prices, demand destruction from slowing growth, and normalizing supply chains all contributed to the view that we have seen peak inflation readings across most economies. This view has been supported by our current readings from PriceStats, which show December monthly prices across the developed markets at -10 basis points (bps), near the lowest reading of the year.

But we are far from being able to rest on our laurels, as the +4.2% YoY developed market reading is still double practically every large central bank target. The drivers of recent improvements are also somewhat narrow, with the outsized 7.8% monthly decline in energy costs (also near the lows of 2022) providing little comfort given the volatility in energy prices amid the ongoing war in Ukraine. Food prices also continue to increase at an alarming rate, with the 66 basis point (bps) gain in December (12.1% YoY) still double the highest level we have seen for this category in the decade leading up to the pandemic. These concerns have kept peak terminal pricing a primary investment theme to start the year, although as the analysis that follows indicates, it has become more idiosyncratic across individual country growth and pricing dynamics.

US: Inflation Focus Shifts to Core Services

The US inflation picture ended the year with a more convincing improvement relative to many of the world’s largest economies. The US can now boast two consecutive downside CPI misses following the November reading, which saw improvement at both the headline and core levels. Our PriceStats reading for November indicated up to 30 bps of monthly disinflation (11 bps versus 41 bps in October), which was spot on with the 30 bps decline in MoM headline CPI to 0.3% in November.

This encouraging news continued into the end of the year, with online prices falling another 50 bps to -37 bps in December. The -3.3% fall in monthly transportation costs (our energy proxy) is again the largest contributing factor to these disinflationary gains, with the volatility in this series the main caveat to getting too excited with this improvement. But further analysis of US sector data indicates a mixed picture elsewhere. In particular, the resilience in food prices along with other categories of goods will likely keep the Federal Reserve (Fed) vigilant until a more convincing and sustainable turn in prices becomes evident.

December prices according to PriceStats were well above seasonal averages in household equipment and apparel, two areas that generally see heavy discounting during the holiday season, as seen in the chart below. It’s also worth noting that recent gains in CPI shelter components were impacted the most by falling hotel costs, which may also prove volatile. So, while broad price improvements may still follow into the start of the year, the Fed’s concern over core non-shelter services costs has yet to be convincingly dispelled.

Eurozone: ECB Unlikely to Rest on Improving Eurozone Inflation

Like the US and other parts of the developed markets, inflation in the eurozone appears to have peaked, with early readings dropping to 9.2%, the first single-digit reading since August. The improvement was driven by lower flash readings from Germany, France, and Spain, which all surprised to the downside. Like other economies, a good portion of these improving trends were due to falling energy costs, which got a boost in the eurozone from one-off subsidies. Since these subsidies are set to reverse in early 2023, we will likely see prices begin to normalize higher again. Nevertheless, this may keep the peak price narrative alive, as compressing goods prices have the potential to drive further improvement.

As the chart below illustrates, food price inflation remains an ongoing concern in the eurozone, a development that will likely keep the European Central Bank (ECB) vigilant as rising consumer inflation expectations persist. Our PriceStats measure for headline eurozone inflation shows a 31 bps gain in December, just a touch shy of the record December inflation from 2021 . These crosscurrents have likely continued to support recent hawkish statements from various ECB members, hinting at the continued need for multiple 50 bps hikes until policy is sufficiently restrictive to drive the desired inflation outcomes.