Let's take a quick comment from the European Central Bank:
Prepared by Sofía Cuquerella Ricarte, Ramon Gomez-Salvador and Gerrit Koester
Published as part of the
ECB Economic Bulletin, Issue 1/2022.
Items affected by supply disruptions and bottlenecks and by the reopening of the economy play an important role as drivers of inflation excluding food and energy in the euro area and the United States. As illustrated in Chart B, one important factor in the differences in inflation excluding food and energy between the United States and the euro area is rents, which contribute much more strongly to inflation in the United States. This is in part linked to the fact that rents have recorded substantially stronger growth in the United States, but it also reflects the larger share of rents in the US consumption basket, which includes not only actual rents but also imputed rents for owner-occupied housing. While the impact of rents can help to explain differences in the level of inflation between the euro area and the United States, including before the pandemic, the high level of inflation excluding food and energy observed recently has been driven mainly by supply disruptions and bottlenecks and by effects related to the reopening of the economy. Supply chain bottlenecks have particularly affected prices for used and new cars, and car components, as well as household furnishings and equipment. In the United States, the prices for this group of items soared during the second quarter of 2021 and, after briefly easing, regained momentum in the last quarter of 2021. In particular, used car prices alone accounted for around 1.6 percentage points of CPI inflation less food and energy in December. Overall, items affected by supply disruptions and bottlenecks made a contribution of 2.6 percentage points to the annual growth rate of core CPI inflation in the United States in December (Chart D), whereas the average monthly contribution of this aggregate of items in 2015-19 had been marginally negative. In the euro area, the role of this aggregate has also increased – but its monthly contribution to HICPX inflation remained around 0.5 to 0.6 percentage points up to December 2021 and, thus, substantially smaller than in the United States (Chart B). Additionally, the prices of some goods and services have rebounded owing to the reopening of the economy, with their levels returning to or even exceeding pre-crisis levels. In the United States, this rebound is visible in prices for apparel and, among services, in prices for travel-related services and transportation, which have all risen strongly following the easing of containment measures. This contributed substantially to core CPI inflation in the second quarter of 2021 and remained significant in the last quarter, at around 0.7 to 0.8 percentage points in year-on-year terms (compared with a historical contribution of 0.04 percentage points). In the euro area, the contribution from such reopening effects only started to increase from late summer – in part linked to the later lifting of containment measures – but in recent months it has been similar in size to the contribution seen in the United States.
Turning to the underlying drivers of inflation developments, the United States is more advanced in the business cycle than the euro area and the US labour market has tightened, which has started to be reflected in some upward pressure on wages. Real GDP had already surpassed its pre-crisis level in the United States in the second quarter of 2021 – while in the euro area GDP reached its pre-crisis level only in the fourth quarter of 2021. In the United States, labour market tightness has increased sharply over recent months and the employment cost index for civilian workers has shown a relatively large increase (Chart C). This stands in contrast to the euro area, where so far wage growth – as measured by negotiated wages or, for example, the labour cost index – has remained quite subdued. It should be kept in mind that wage indicators are being distorted by the effects of the crisis, including the important role of job retention schemes, especially in the euro area, which complicates their interpretation.
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