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Europe’s inflation is significantly higher than the US as wages experience growth

TL;DR Breakdown

  • Europe is facing a more persistent inflation challenge compared to the United States.
  • The US has recorded a 2.1 percent annualized expansion in the second quarter, raising optimism for a “soft landing” that controls inflation without a recession.
  • Wage growth in Europe, particularly in the UK and the eurozone, has outpaced that in the United States.

Europe is grappling with a more persistent inflation challenge than the United States. Investors and analysts are sounding alarms about the growing possibility of differences in economic outcomes and policy responses between the two sides of the Atlantic.

In the past year, consumer price inflation in the US reached its highest levels in decades but has since dropped considerably and is now notably lower. Over recent months, the annual wage growth for workers in the UK and several Eurozone nations has outpaced the salary increases seen among their American counterparts. This shift raises concerns about the future economic paths of these regions.

Europe has had a substantial slowdown in growth 

In August, the inflation rate in the eurozone held steady at 5.3 percent. This stability was influenced by the resurgence of energy inflation due to rising fuel prices and the removal of electricity and gas subsidies in countries like France. Meanwhile, core inflation, which excludes energy and food, saw a slight decline within the eurozone. However, at 5.3 percent, it has only returned to its level at the beginning of the year and remains close to the record high set in March.

As Europe experiences a substantial slowdown in its growth, the US has recorded a 2.1 percent annualized expansion in the second quarter. This figure and indications of labor market weaknesses have sparked optimism about a “soft landing” for the US economy, which aims to control inflation without plunging into a recession.

Katharine Neiss, formerly with the Bank of England and now the Chief European Economist at the US investment firm PGIM Fixed Income, noted clear signs of divergence between the two regions. She highlighted that US core inflation has consistently decreased since the middle of the previous year, whereas it has declined slower in Europe. Additionally, wage growth in the US has been declining faster.

Huw Pill, the Chief Economist of the Bank of England, spoke at a conference in South Africa and pointed out that Europe has encountered different challenges than the US. These challenges, he noted, have been more challenging for policymakers to address. He highlighted the significant increase in European energy prices, which have reached the equivalent of $600 a barrel in natural gas prices. This factor has yet to receive full recognition in the global macroeconomic discussion.

In Europe, economic challenges have been harsher on both businesses and individuals. Consequently, they have put up a more determined resistance to losses than their US counterparts, resulting in a deeper-rooted inflation problem.

In contrast, policymakers and economists in the United States hold a more positive outlook regarding the inflation trajectory. Most anticipate gradually easing price pressures, at least in the upcoming months, based on factors such as a slowdown in demand, the gradual resolution of supply chain disruptions, and a cooling labor market.

Europe’s wages expected to experience growth 

Recent data from the US Bureau of Labor Statistics, released on Friday, indicates that the growth in average hourly earnings has stabilized at an annual rate of 4.3 percent for August. Conversely, pay levels surged by 8.2 percent in the UK in the second quarter. In comparison, hourly labor costs in the eurozone are projected to continue rising at nearly 5 percent, close to their historical highs.

Sven Jari Stehn, Chief European Economist at Goldman Sachs, believed that stronger wage growth in Europe would likely lead to higher inflation in the services sector compared to the United States. Meanwhile, an executive at the European Central Bank, Isabel Schnabel, cautioned in a speech that eurozone inflation could decrease slower than it increased. While businesses tend to pass on significant cost increases to consumers quickly, they may be less willing to pass on cost reductions.

In the UK, headline inflation reached 6.8 percent in July, with the core figure at 6.9 percent. Meanwhile, in the United States, headline inflation, measured by the personal consumption expenditures index, stood at 3.3 percent. The “core” PCE index, which excludes volatile items, was at 4.2 percent.

Many economists anticipate that lower inflation will enable the Federal Reserve to halt its rate hikes. At the same time, they predict that the Bank of England will implement two more rate hikes and the European Central Bank one more. Investors also anticipate that the Federal Reserve will cut rates several quarters before the other two central banks.

Peter Tchir, Head of Macro Strategy at Academy Securities in the US, remarked that there is a significant disparity between the challenges Europe is facing and what we’re experiencing. It wouldn’t be surprising if, in a year, we are more concerned about deflation than inflation, he added.