According to the Financial Times, February 4, central banks around the world have begun to prepare for interest rate cuts in the context of continued weakening inflation. But as the US jobs data shows, the hot labor market is the biggest potential obstacle preventing them from achieving their 2% inflation target.
Eswar Prasad, an economist at Cornell University in the United States, said that for central banks, the data released on the 2nd made the decision to declare victory in the battle against inflation "a much more worrying". "The reality is that in the presence of these pressures, it will be very difficult to sustainably tame inflation unless productivity growth remains strong," he said. ”
According to the report, it is undeniable that the inflation situation has improved quite significantly. A year ago, the Federal Reserve and other central banks were in the midst of a "brutal" rate hike process when there were fears that the rate hike would push the economy into recession.
In Frankfurt, Germany, ECB President Christine Lagarde made a positive statement on January 25, announcing that the "disinflationary process" is taking effect: headline inflation in the eurozone is currently at 28%, which is not much different from the 2% target set by the ECB.
Bank of England (central bank) Governor Andrew Bailey told reporters in London on the 1st that he is seeing "good news on inflation" after the inflation rate in the UK has been reduced by half to 4% in six months.
Mahmoud Pradan, head of global macroeconomics at Amundi Investment Institute, believes that inflation is currently "on a definite downward trend and it is only a matter of time before we see central banks cut interest rates aggressively this year".
He added: "Out of an abundance of caution, central banks** want to wait a little longer, but I expect the Fed, the ECB and the Bank of England to all cut rates by the middle of the year." ”
The report notes that the continued progress of this "disinflation" story will largely depend on the fate of the labor market. While the initial decline in inflation was driven by external factors, current progress hinges on the more difficult task of curbing endogenous prices**. This task will become even more difficult if employment and wage growth remain too strong.
Economists point out that squeezing out the last vestiges of excessive prices** may require policymakers to continue hawkish policies in order to further dampen demand.
This is a reflection of a question that has been plaguing central banks for months: Will the "last mile" prove to be the hardest part of the effort to bring inflation down to the 2% target? If this is the case, the central bank will have to be extra patient before cutting interest rates.
Among the major central banks, the Fed** has always been the least concerned about the difficulty of completing the final stage of its inflation-fighting journey.
Lagarde, on the other hand, has been warning that it is "premature" to even discuss a possible rate cut at this stage – the key reason being the constant pay**. The fear for the ECB and other central banks is that workers will demand large wage increases to restore the purchasing power they lost in the initial price stage. As this increased spending power enters the economy, it will trigger a new round of price spikes.
As in the US, these concerns are underpinned by the surprisingly resilient nature of the eurozone labor market. The unemployment rate in the eurozone continued to be at 6 in December last yearA record low of 4%. Many businesses – especially in the service sector – are still complaining that labor shortages are a major constraint on production.
Concerns about other "upside risks" to inflation have made central banks** more cautious. One obvious risk comes from the conflict-ridden Middle East; The disruption of shipping caused by Houthi attacks on ships in the Red Sea is widely seen as a factor that could push inflation to higher-than-expected levels. Given the importance of this ** route for imports from Asia, Europe seems to be particularly vulnerable.
*: Reference message.