Does cooling inflation signify our exit from the woods?

The global economy is again sending mixed signals. Inflation in the US continues to ease, offering hope that the worst of the price surge is behind us.

- Francois Stofberg

On the other hand, persistent structural challenges remind investors that disinflation does not necessarily mean stability.

The latest US inflation report delivered what markets wanted to see: another modest decline.

Consumer price growth remains above the US Federal Reserve’s 2% target, but the overall trend is heading lower.

However, the details tell a more complicated story.

Once you remove the unusually low prices of new and used vehicles, core goods inflation is still running above 4%. And if you exclude the lagging “shelter” category (which takes months to reflect changes in housing costs), “supercore” services inflation also hovers near 4%.

The headlines, in other words, flatter the fundamentals.

This uneven progress explains why the Fed remains cautious. For inflation to truly return to target, price pressures in the services sector (particularly in transport, insurance and leisure) must cool further.