Weekly Updates
Weekly Updates
- Financial markets seem to believe a story about divergent inflation risks between Europe and the United States. European inflation has slowed to 2.4%, while US consumer price inflation is 3.5%.
- The reality is that while the Euro area had 2.4% y/y inflation in March, the US also had 2.4% y/y inflation in March—using the US harmonized inflation measure. US harmonized inflation adopts the same method as Europe to calculate inflation—it is a like-for-like comparison. The US harmonized measure does include some price discounts that the Europeans do not, but this is a minor difference. Using the respective harmonized core inflation measures, US inflation is notably lower than that of the Euro area.
- Current differences between headline US and European inflation are thus more about calculation methods than inflation realities. Headline US inflation is dominated by the fantasy price of owners’ equivalent rent, and owners’ equivalent rent is not allowed anywhere near either European or US harmonized inflation data.
- Identical US and European inflation on a like-for like basis does not prevent central bank policy divergence. The US Federal Reserve does not focus on the international harmonized inflation measure as a target. However, the similar real-world inflation experience does raise questions about the economic consequences of any policy divergence.
Stay up to date
Stay up to date
