Inflation Returns to Target Range Across Advanced Economies

Headline consumer price inflation across the G7 economies averaged 2.3% in September, the lowest reading since early 2021 and the closest the group has been to the 2% target in five years.

The disinflation journey has been longer and more uneven than central bankers projected. In early 2022, most official forecasters expected inflation to return to target within eighteen months. It has taken nearly four years.

The composition of price pressures has changed. Goods inflation is now negative in most advanced economies, dragged down by falling energy prices and cheap imports from Asia. Services inflation, however, remains elevated at 3.8% on average across the G7.

"The last mile is services, and services is wages," said Rebecca Lindholm, senior economist at the Peterson Institute. "Until wage growth moderates to something consistent with 2% inflation plus productivity, central banks cannot declare full victory."

Wage growth is decelerating but not yet at levels consistent with target. Average hourly earnings in the U.S. are up 3.8% year-over-year. Collective bargaining agreements in Germany and Japan are settling at 3.5% to 4%.

Inflation expectations, critically, have remained anchored. Five-year-five-year forward breakevens in the U.S. are at 2.28%, and comparable measures in Europe and Japan are close to their long-run averages. The credibility gained in the 2022-24 tightening cycle appears intact.