Comparing Inflation Success: Europe vs America
While inflation rates have dropped significantly in Europe and the United States, America lags behind with delayed interest rate cuts by the Federal Reserve. Explore the contrasting inflation strategies and economic outlooks between these two global regions.
Inflation has decreased from its peak levels in both the United States and Europe. However, progress in reducing inflation has slowed down in the United States. The Federal Reserve is now anticipated to begin lowering interest rates after the European Central Bank.
The annual US inflation rate, measured by the Personal Consumption Expenditures index, was 2.7% in March, up from 2.5% in February. The Federal Reserve's target is to maintain inflation at 2% in the long term.
The Consumer Price Index, another measure of US inflation, has also been on the rise. In March, the CPI increased by 3.5% compared to the same month in 2023, which was higher than the 3.2% increase seen in February.
Boston, MA - January 10: Janet Yellen gives remarks during a presentation. On a tour of Roxbury Community College's Center for Smart Building Technology, US Treasury Secretary Yellen spoke of how the Inflation Reduction Act is lowering energy costs.
US Treasury Secretary Janet Yellen visited Roxbury Community College's Center for Smart Building Technology in Boston, MA on January 10. During her presentation, Yellen discussed the impact of the Inflation Reduction Act in reducing energy costs. A photo by Lane Turner/The Boston Globe/Getty Images captured the moment.
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In the meantime, annual consumer price inflation in the 20 eurozone countries has been steadily decreasing since the beginning of the year. It was recorded at 2.4% in March.
Based on market expectations, the European Central Bank (ECB) is likely to begin lowering interest rates in June, which is three months ahead of the forecasted rate cut by the Federal Reserve.
There are signs that the Fed might raise borrowing costs, which was previously thought unlikely. Fed Governor Michelle Bowman mentioned she would support a rate hike if inflation progress slows down or goes backwards.
So why does the US seem to have a larger inflation issue compared to Europe?
A difference of definition?
Some economists argue there isn’t actually much daylight between the US and European rates of inflation, pointing to a quirk in the US measures.
The PCE and CPI, unlike the ECB's preferred gauge, take into account owner-occupiers' housing costs. This includes the potential income from renting out your home, which you would be giving up by living in it.
This measure is meant to monitor inflation in the real estate sector, considering that most Americans are homeowners. However, Paul Donovan, chief economist at UBS Global Wealth Management, points out that these theoretical housing costs are not actually felt by people.
The weight assigned to housing costs for owner-occupiers is significantly higher in the US CPI compared to the PCE. According to consultancy Capital Economics, the weights are 32% and 13% respectively. In contrast, housing costs for owner-occupiers are not factored into the eurozone's main consumer price index.
This difference between the US and eurozone inflation rates is highlighted by Simon MacAdam, who is the deputy chief global economist at Capital Economics.
When looking at core inflation rates in the United States and Europe over the past six months, economist MacAdam discovered that they have been quite similar. These rates do not include energy and food prices in the calculation. MacAdam also noted that the US does not have a significant issue with overall excessive price pressure, despite what some commentators may suggest.
Diverging economies
The levels of inflation are basically the same on both sides of the Atlantic. So, why are the central banks in these regions planning to reduce interest rates at different times?
The straightforward explanation is that central banks will adjust monetary policy based on the inflation measure they focus on, not on harmonized or adjusted measures, according to MacAdam.
However, the situation is more complex. Carsten Brzeski, the global head of macroeconomic research at ING, pointed out that there is a larger gap in economic growth between transatlantic regions, as told to CNN.
The International Monetary Fund predicts that the US economy will grow by 2.7% this year, while the eurozone is expected to see only a 0.8% expansion.
US employers have been hiring at a record pace, with 303,000 jobs added in March. Compared to European governments, Washington has invested significantly more in supporting consumers and businesses during the pandemic. This has resulted in strong consumer demand in the United States.
Despite initial reports on Thursday indicating slower US growth in the first quarter, Treasury Secretary Janet Yellen remains optimistic, stating that the economy is still performing well. 
Houses near the Chesapeake Bay in Centreville, Maryland, pictured in March 2024.
Jim Watson/AFP/Getty Images
Europe’s economy is currently facing challenges, partly due to the lasting effects of an energy crisis. The situation worsened when Russia, a major supplier of pipeline gas to Europe, invaded Ukraine in 2022. This led to a significant increase in natural gas prices in the region.
Consequently, the annual inflation rates in the eurozone surged to levels higher than the PCE. In 2022, inflation peaked at 10.6% in the eurozone, compared to 7.1% in the PCE.
The US economy's strength is increasing the chances of high inflation making a comeback, according to Brzeski. This is causing the Fed to be more cautious about cutting rates compared to the ECB.
Both the US and the eurozone are facing labor shortages, leading employers to raise wages to attract and retain workers, driving up inflation in the services sector. However, consumer demand in the US seems to be stronger overall.
"We notice that the savings ratio of US households is decreasing, indicating that Americans are more willing to use their savings to make purchases," he said. "On the other hand, European households tend to be more cautious."
Davide Oneglia, director of European and global macroeconomics at research firm TS Lombard, shares a similar perspective. "The US consumer is more inclined to spend as they may see more promising opportunities in the job market," he explained to CNN.
Editor's P/S:
The article highlights the nuanced differences in inflation dynamics between the United States and Europe. While both regions have experienced a decrease in inflation from peak levels, the progress has been slower in the United States. The differing measures of inflation, particularly the inclusion of owner-occupiers' housing costs in the US measures, contribute to the perceived divergence.
The article also emphasizes the contrasting economic conditions between the two regions. The robust US economy, driven by strong consumer demand, is fueling concerns about a potential resurgence of inflation. In contrast, Europe's economy faces challenges due to the ongoing energy crisis and slower growth prospects. These factors influence the timing and pace of interest rate adjustments by the Federal Reserve and the European Central Bank, with the ECB expected to begin lowering rates sooner than the Fed.
