US inflation overestimated by headline inflation, euro-zone inflation underestimated by headline inflation

US headline inflation is overestimated by the official measure of inflation, which includes the rise in rents imputed to homeowners. In reality, headline inflation in the United States, excluding imputed rents, is 2.6%, close to core inflation excluding imputed rents and the rise in unit labour costs. Euro-zone headline inflation is underestimated by the official measure of inflation due to the sharp fall in import prices. In reality, inflation, excluding energy and unprocessed food, is still 3.1%, and the rise in service prices is 4.0%, which is close to GDP deflator growth once the fall in profit margins is taken into account. This means that: The Federal Reserve can cut interest rates without hesitation, since rents imputed to homeowners have no effect on purchasing power or corporate production costs; In principle, the ECB should hesitate before cutting interest rates, since true inflation, once adjusted for import prices, is close to 4.0%.