Recent inflation developments in the United States and the euro area – an update

After headline inflation had already reached very high levels in the United States in the first half of 2021 and increased further to 7% in December, euro area inflation also recorded a very rapid increase in the second half of 2021 but remained much lower than in the United States at 5% in December and – according to Eurostat’s flash release – at 5.1% in January. Most of the difference in overall inflation developments has been due to the far stronger increase in inflation less energy and food (and from a higher starting point) in the United States than in the euro area. Large contributions from some special items – including used car prices – continue to play a key role for explaining differences in inflation excluding food and energy. Turning to underlying drivers of inflation developments, the United States is more advanced in the business cycle than the euro area and the US labour market has tightened, which has started to be reflected in some upward pressure on wages. However it should be kept in mind that the pandemic is a unique situation with considerable differences in inflation developments when compared with “normal” times, which require close monitoring and add to the uncertainty surrounding the inflation outlook in the United States as well as in the euro area. Upside surprises in inflation data releases have continued to be larger for the United States than for the euro area over recent quarters. Looking ahead, Consensus Economics forecasts expected inflation to remain below 2% in 2023 in the euro area but not in the United States and uncertainty around the outlook for inflation seemed to be much greater for the United States. JEL Classification: E31, J3, E2, N10