Debate on Inflation Outlook
The inflation outlook has sparked a heated debate, and esteemed businesspeople have expressed doubts regarding central banks’ control over the problem. While the latest consumer price data for the eurozone, the United States, and the United Kingdom provide some encouraging news about headline inflation trends, core inflation, which excludes volatile energy and food prices, remains stubbornly above central banks’ target rates.
China’s Unique Situation
China, the world’s second-largest economy, seems to be exempt from the inflation predicament. Instead, recent consumer price data reveals deflation, with the country’s core consumer price index declining by 0.5% annually in November. Previously, analysts speculated that China was transmitting deflationary pressures worldwide, primarily due to its low-cost manufacturing and increased market share in foreign economies. If this were still the case, some of the current worries about inflation may be alleviated.
When analyzing the challenges facing China’s property market, we can draw from similar situations in other countries to anticipate prolonged difficulties. However, a more optimistic perspective suggests that Chinese policymakers are well aware of these issues, thanks to previous cases and warnings issued by various experts.
Additionally, global commodity prices, significantly influenced by Chinese demand, must be taken into account. Surprisingly, the news at the end of 2023 indicates that these prices have been more favorable than anticipated, potentially leading to further reductions in headline inflation across many countries. Despite the Middle East turmoil and the Ukrainian conflict, crude oil prices have remained soft, defying expectations and showcasing the unpredictability of this market.
Two key factors contribute to current inflation trends. Firstly, the significant decline in monetary growth in multiple economies, combined with favorable commodity price trends, provides reassurance. While it has been a while since anyone, except staunch monetarists, claimed a direct link between money supply and inflation, recent years have shown that a radical acceleration in monetary growth, as witnessed in late 2020 and early 2021 in the US, can lead to increased inflation.
Secondly, inflation expectations in crucial countries have exhibited reassuring signs, likely influenced by commodity and monetary trends. Notably, the latest University of Michigan survey shows a decline in consumers’ five-year inflation outlook, suggesting that long-term inflation expectations are not rising sustainably or becoming “un-anchored.”
The response of central banks is the final, and perhaps most challenging, question. The US Federal Reserve Board’s latest forward guidance to markets implies a 75 basis point cut in interest rates for 2024. However, other central banks, particularly in Europe, are resisting financial markets’ expectations of interest rate cuts next year, though markets seem to be disregarding this stance.
With core inflation still above target, real wage growth, and negligible evidence of productivity growth, central bankers are reluctant to cut rates prematurely. Nonetheless, as they attempt to influence markets through guidance and public statements, they must acknowledge that markets, in their collective wisdom, may perceive something that they do not. If the data takes a significantly favorable turn, central banks may adjust their approach.
Inflation in Some Countries
In certain countries, especially the UK, inflation is finally surpassing consumer price growth.
Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is a member of the Pan-European Commission on Health and Sustainable Development.