Un nouveau regard sur l'offre

• While demand remains key to the US inflation trajectory, the continuing improvement in supply conditions – assuming disruptions in China do not stand in the way – will provide some welcome, albeit volatile, help.
• The debate on a possible wage/price loop is gaining traction in the Euro area. We explore alternative data.

The “mini rally” which has started in response to the better-than-expected October inflation in the US remains overly dependent on a just a few data prints and can easily flip. This makes November inflation, to be released on 13 December, incredibly – and probably excessively – important, especially since it will come out just the day before the Fed meeting which is widely expected to put an end of the “jumbo hikes”. The minutes of the last FOMC meeting make us believe a gear-change to a 50-bps hike in December is a very safe bet, but the market may have to deal with volatile inflation in the months ahead. There will be uncomfortable moments. While the market attention had flipped to demand as the main source of US inflation, supply conditions were quietly improving. Supply lines are less disrupted, US import prices continue to decelerate, and the decline in delivery times and backlogs signals that production is no longer busy catching up with demand. Industrial goods prices should continue to decelerate in the US – this was the main driver of the better core inflation print last month. It’s a very volatile variable though, so that upside surprises cannot be excluded. Potential disruptions in Chinese supply, amid protests against the “closed loop system” can also derail the general improvement. US services inflation needs to roll over as well for the Fed to start feeling inflation is definitely on the right track. The tentative softening of the labour market will help, but this will need to be confirmed in “hard data”. The market cannot take too many strong payrolls on the chin. The ECB’s October message was also consistent with a slowdown in the pace of hikes but contrary to the FOMC the Governing Council needs to deal with a higher-than-expected inflation print. We continue to expect 50 basis points “only” in December though. Focus has moved to wages. We explore some of the alternative sources currently available to get a timely picture on that front. “Negotiated wages” – the ECB’s usual preferred metric – may send a too conservative message, but equally, data based on job advertisement sites may over-state the pace of wage growth.