Introduction: It's a Christmas miracle: Inflation is cooling much faster than expected around the world
If economists are correct, the gift will continue next year, bringing inflation back to normal for the first time in three years.
Core inflation in the U.S., Europe, and some emerging economies, excluding food and energy**In the three months to November, the annualized rate was 22%
By the end of 2024, average inflation in these economies should be at or near the inflation targets set by most major central banks.
Cooling inflation protects growth in two ways:One is to increase household purchasing power, and the other is to allow the central bank to cut interest rates
Eurozone inflation will reach 13% and the UK will reach 27%, and the Fed's much-valued personal consumption expenditures** index will fall to 22%
The U.S. Department of Commerce announced last Friday that the November PCE**26%, excluding food and energy**32%, and the annualized rate of increase over the past six months is only 19%
The Federal Reserve, the European Central Bank and the Bank of England all set inflation targets of 2%.
First, the transatlantic force has helped to cool inflation
The common factors driving the cooling of inflation are food, energy, global commodities** and monetary policy, is the reason why inflation in the eurozone will fall back to target sooner.
The US and UK are also facing greater inflationary pressures from tight labor markets, and this pressure is only slowly slowing down. ”
The global economy has suffered multiple rounds of inflationary shocksFiscal and monetary stimulus in 2021 triggered a surge in demand, global production and shipping disruptions have caused commodities to soar.
The Russia-Ukraine war in 2022 caused commodities to climb and energy cuts to affect the eurozone, causing inflation to reach a multi-decade high of 106%
The labor force** has also tightened due to the pandemic, and the strong demand for labor has led to a surge in wages, which in turn has been passed on to the service sector**.
Housing (rent) costs are also starting to push up services inflation after a lag
In the U.S., November consumption was 3 year-on-year1%, only **1 after excluding housing**4%, but in Europe, the impact is much smaller.
**Chain tending to unwind, driving inflation down at the end of 2022 and throughout the yearand this trend is likely to continue next year.
In the U.S., for example, used cars**, the main driver of inflation in the first place, are still expected to decline further in early 2024 as the market returns to normal.
Energy and commodity markets have also adapted to the impact of the Russia-Ukraine war through market adjustments, thereby pushing down energy commodities** and stabilizing food costs.
These factors continued to tame inflation in '24, with "energy** having come down and potentially trickling into grocery in the coming months, given the decline in diesel**."
The job market in the world's major economies has begun to rebalanceWage growth, one of the key contributors to the cost of services, has cooled and is likely to continue in '24
The timing and impact will vary from country to country, and this is already happening in the United States, where wage pressures are starting to decrease as a large influx of labor force has arrived.
Second, a tight labor market could slow the decline in inflation
The pace of cooling inflation in the UK is likely to be slower, with disability rates particularly high in the UK due to longer wait times for health care, resulting in a reduced labour force**.
While the number of immigrants in the UK is at record highs, their skills often do not match the vacancies.
Slowing inflation, coupled with slower or stagnant growth in major economies, has set the stage for interest rate cuts next year
The Fed signaled a rate cut earlier. "The economy is doing pretty well. Financial conditions have eased and profit positions have improved. ”
The Fed is likely to cut rates three to four times, instead of the six as the market expectsThe economy feels very good and feels like there should be a soft landing. ”
This prospect has led to higher bonds** and lower yields, reducing the cost of borrowing for U.S. companies and homebuyers
European borrowers may have to wait longer, they are more dependent on banks than capital markets, and bank lending rates are closely linked to central bank interest rate targets.
In the second half of next year, there will be no significant decline in bank lending rates in the eurozone, and bank lending rates may fall even later due to more stubborn inflation.
With global inflation falling sharply, global central banks are expected to cut interest rates 152 times next year, the most since 2009
Most major economies will grow at a slower pace in 2024 than in 2023But interest rate cuts, cooling of energy and food, and chain normalization will save the global economy from a recession
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