Disinflation continued ahead of Trump’s tariff salvo

Overview Inflation continued to ease in both the euro area and US ahead of Trump’s large tariffs announcement. Underlying inflation is slowing especially due lower services inflation amid low goods inflation. Longer-term inflation expectations have declined significantly due to a weaker growth outlook for the world while short-term inflation expectations in the US have risen greatly due to the near-term prospects of higher goods prices in the US.

Inflation expectations: Market-based inflation long-term expectations have declined significantly by 10-15 bp after Trump’s sweeping tariff announcements due to lower oil price and a weaker growth outlook for the world economy.

US: US inflation surprised to the downside in March ahead of Donald Trump's 'Liberation Day' tariff announcements. Headline CPI declined by 0.1% m/m SA (Feb. +0.2%) while core inflation slowed down to just +0.1% m/m SA (Feb. +0.2%). Energy prices contributed negatively, while food inflation accelerated. On the core side, goods prices declined despite the looming tariff threat. Broader services inflation also slowed down, which is not a positive signal for firms' pricing power. While the data is naturally already somewhat dated, at the very least broad inflation pressures were clearly moderating before Trump unleashed the latest salvo of tariff uncertainty.

Euro: Inflation in the euro area closed in on the 2% target quicker than expected in March, with headline inflation falling to 2.2% y/y from 2.3% in February, driven by lower energy and services inflation. The latter decreased to 3.4% y/y from 3.7%, which is encouraging, although the elevated growth rate remains a concern for the most hawkish camp in the ECB. We expect the US trade war to be a disinflationary force in the euro area lowering HICP inflation by 0.2 percentage points in the coming 12 months due to weaker world demand, a lower oil price, a higher EUR/USD, and even lower prices on imported goods from China. Hence, the disinflation force is set to be amplified as EU retaliation against US remains limited.

China: March CPI increased to -0.1% y/y (cons: +0.1% y/y) from -0.7% y/y while core CPI rose 0.5 % y/y from -0.1% y/y in February in a sign of higher demand.

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