Sticky services inflation raises upside risks

Inflation still looks set to be in line with central banks’ targets next year (see Chart 1), but upside risks have increased outside the US. With the sharp falls in energy and food inflation behind us, disinflation has slowed amid persistently strong inflation in the services sector. Demand and labour market conditions appear consistent with a renewed decline in wage and price pressures to come. And with interest rates starting from high levels, cuts in the coming months need not reverse this trend. Indeed, it has become clearer that the US and Canada are on the right track. However, sticky wage growth is a bigger upside risk to inflation in the UK, Australia, and the euro-zone. And we expect tight labour markets to keep interest rates high in Latin America and Central Europe.