Morning from Europe!

The US CPI report printed at hot levels yesterday

The details of the report revealed that some service categories remain too sticky or too hot to bring inflation back to 2%. The shelter category is simply slowing much less aggressively than forecasted by everyone 12-18 months ago and the recent MoM momentum suggests that annual shelter costs will settle around 4-5%, which is way too hot for a 2% inflation rate target.

The core inflation momentum is running at around 4% and there are no signs of a true deceleration over the past 3-5 months meaning that the most likely scenario is that the annual rate of inflation settles clearly above target now, unless something major breaks in credit space, which we are yet to have any clear indications of.

Chart 1: Decomposed US CPI developments