The difference in core inflation between the United States and the euro area is mainly due to housing rents. Since last year’s blogpost on the issue, this feature has become even more blatant: core inflation excluding housing rents is currently lower in the United States than in the euro area, whereas US core inflation is still much higher.
A blogpost published here a year ago with Vincent Grossmann-Wirth (in French; in English) looked at the differences between core inflation in the United States and the euro area. Our main objective was to break down price indices in order to study comparable activities reflecting domestic macroeconomic conditions across the Atlantic. Hence, our analysis focused on what is referred to as "core" inflation, i.e. price inflation excluding energy and food. Energy and food prices are more volatile and, in the case of energy in particular, mainly determined by international factors. It is therefore better to exclude them when comparing the fundamental differences in inflation across countries. In this update, we focus on the United States and the euro area (rather than on France) because, as seen in last year’s blogpost, the story is similar for French and euro area inflation rates.
Our previous blogpost highlighted two striking facts:
Based on these facts, we reached the conclusion that a good understanding of housing markets is key to interpreting differences between US and euro area inflation rates. One should not attribute to general macroeconomic conditions differences that are mostly driven by a specific sector whose activity and asset prices are known to follow peculiar cycles. There is no case for using or targeting a price index excluding housing – since it arguably represents a large share of households’ budget – but the singular features of housing price cycles should be taken into consideration when discussing inflation differentials.
Below, we present updates of these two stylised facts, with data from 2017: