Inflation is falling; but not enough – The Economist

Before the pandemic the idea of an annual rate of inflation of 10% in the euro zone would have seemed like a horror story. In November it was good news. Inflation had been 10.6% the month before. A similar surprise came from America. As inflation falls, so does the expected pace of interest-rate increases. On December 14th and 15th the Federal Reserve, European Central Bank and Bank of England will each probably raise rates by half a percentage point—a deceleration from the three-quarter-point rises that have recently prevailed.

Globally, inflation has begun to decline primarily because energy prices have eased since the summer and because supply chains, long gummed up by the pandemic, are operating more smoothly. Yet inflation remains a very long way from central banks’ 2% targets. There are three reasons to think rate-setters will struggle to hit their goals soon.

The first is a continued scarcity of workers. While the news on prices has been good, the latest wage data are worrying. In America average hourly earnings had shown encouraging signs of softening since August. But updated figures released on December 2nd upended the picture, showing annualised growth of 5.1% over the past three months, roughly in line with other surveys. Since the data came out stockmarkets in America have fallen, in expectation of prolonged interest-rate rises. In Britain wages are growing at a similar rate; a wave of strikes may prompt still bigger increases. The euro zone’s labour markets, though not as sizzling, are hot enough to make policymakers worry that energy inflation could affect the rest of the economy as workers bargain for higher wages to offset rising living costs.