US CPI inflation was an annual 1.2% in October while the "core" rate – excluding food and energy – fell to just 0.6%. These figures have reinforced perceptions that inflation is lower in the US than in other major economies and that pressures are continuing to weaken.

As previously discussed, however, the US numbers are lowered by the inclusion of imputed housing rents, which are estimated to have been unchanged over the last year. If recalculated using the EU's HICP methodology, US CPI inflation was 1.8% in September (the latest available month for this measure) – the same as in the Eurozone.

Rents have risen slightly in recent months, probably in response to a fall in rental vacancy rates – see first chart. The drag effect on the published inflation numbers, therefore, could lessen.

The "core" rate has been driven lower recently by goods price weakness – services inflation has been stable. Producer price inflation for core consumer goods, however, has been firming and normally leads the CPI measure. The PPI pick-up, meanwhile, partly reflects a rise in import prices, including from China – second chart.

The bottom line is that inflationary trends are not significantly different from those in other countries and do not warrant the Federal Reserve's decision to implement further unilateral monetary easing – especially with money supply growth accelerating and fiscal policy less restrictive than elsewhere.

The net percentage of manufacturers planning to raise prices over the next three months is at its highest seasonally-adjusted level since September 2008, according to the November CBI industrial trends survey. The CBI attributes the increase to pass-through of higher raw material costs; the survey refers to factory-gate prices so should be unaffected by the coming VAT hike.

The CBI balance correlates with CPI goods inflation, suggesting that this would be heading significantly higher into early 2011 even in the absence of the VAT rise – see chart.

The latest labour market statistics report is mildly encouraging, showing employment at a new recovery high and a "surprise" fall in claimant-count unemployment last month.

The wider labour market survey measure of unemployment declined by 9,000 from three months ago but would have dropped 92,000 but for the return of 83,000 "discouraged workers" to the labour force, presumably partly reflecting improving job prospects.

Part-time employment accounted for 142,000 of the 167,000 increase in jobs over the last three months but total hours worked still increased by a solid 0.4%.

A disappointing feature of the report was a further decline in the stock of job vacancies but this is at odds with survey evidence and may reverse shortly – see previous post.

Earnings growth remains low but is moving up, partly in response to sustained high inflation. A measure of total pay growth, incorporating a 12-month moving average of bonuses, rose to an annual 2.2%, a 20-month high – see chart.

CPI inflation rose to an annual 3.2% in October, above the Bloomberg consensus forecast of 3.1% but below the 3.3-3.4% suggested in a post a fortnight ago.

The favourable surprise relative to that projection partly reflected a fall in food inflation from 4.9% to 4.2% as fresh food prices increased by less than a year earlier. This is likely to prove temporary, with recent increases in global commodity costs suggesting a rising trend into early 2011, allowing for the normal lag – see chart.

As expected, higher fuel costs added 0.1 percentage points to the CPI headline rate. Services inflation, meanwhile, firmed from 3.7% to 3.8%, mainly as a result of year-earlier reductions in bank overdraft charges and mortgage arrangement fees falling from the calculation.

With little news in today's report, CPI inflation still appears likely to rise to about 4% by early 2011, reflecting high VAT pass-through, food and energy cost increases and stable "core" pressures. The Bank of England last week revised up its central projection for the first quarter to about 3.5% from 3.0% in the August Inflation Report.

Governor King's latest exculpatory letter was accepted uncritically by a Chancellor keen to leave the door wide open to "QE2". The "temporary shocks" defence, however, is wearing thin. Commodity price gains are partly the consequence of a secular rise in demand for raw materials from emerging economies, a trend the MPC has consistently ignored. Similarly, exchange rate weakness has not been imposed on the UK but partly reflects the MPC’s policy choices. The scale of the recent fall is no guarantee that it will not be repeated. The effective rate had also declined by 20% over three years at the end of 1974 but plunged a further 25% over the following two years.

The extent, moreover, to which such “shocks” pass through to inflation, instead of being absorbed by a reduction in profit margins or nominal wages, depends on the stance of monetary policy and its impact on inflationary expectations. A high degree of pass-through is prima facie evidence that monetary conditions are too loose and that the inflation target is failing to anchor expectations, with firms confident that price hikes will not cause them to lose market share because the MPC will tolerate a general rise in inflation.

Global industrial output – as proxied by combined production in the G7 and seven large emerging economies – is back on its post-2000 trend path, having staged a V-shaped recovery since early 2009. The "E7" have accounted for 60% of the rise in combined output, with production now well above trend in these economies, explaining recent evidence of "overheating" – see first chart.

Rapid E7 growth fuels inflation partly by boosting food demand and prices. A GDP-weighted average of E7 consumer price inflation moved above 5% in October and should rise further as a result of recent food commodity price gains – second chart. (The average weight of food in the CPI baskets of 120 non-OECD countries was 37% in 2006, according to a 2008 IMF study.) Pressures, moreover, may be spilling over to non-food prices – see last week's post on Chinese inflation.

E7 central banks have been trying to tighten monetary policies without jacking up interest rates, which have risen meaningfully only in India and Brazil. An average of E7 short rates remains well below inflation, with the gap widening recently – third chart. This policy approach may have reached its limit. The last tightening cycle, in 2007-08, ended only after the average interest rate had risen above headline inflation.

E7 growth outperformance since early 2009 has been supported by faster monetary expansion but real M1 has slowed recently, narrowing the gap with the G7 – fourth chart. Rising inflation and further policy tightening – particularly if in the form of higher interest rates – could sustain this trend, in turn suggesting that E7 relative economic performance will be less impressive during 2011. Emerging market equities may not be priced for this outcome, currently trading on a higher price to book than developed markets.