A further drop in US inflation on Tuesday and a small rate hike in the world’s major banks later in the week will set the tone for a new chapter in the global economy.
The headline inflation data for most economies will continue to improve in the coming quarters as increases in energy and food costs occur in 2022 to stop annual calculations.
But monetary policy makers at central banks will be worried that inflation will continue at a faster pace than they would like – and they will remain open to rate hikes to show they are committed to returning inflation to levels seen before the coronavirus pandemic.
Silvia Ardagna, European economist at Barclays Bank, said: “Inflation is coming down and the rate of inflation is low, but central banks will still go for bigger rates.” [the 0.25 percentage points we have been used to] historically.”
The US headline that comes out later today is expected to show a decline to 7.3 percent in November, from 7.7 percent in the previous month and way below the 9.1 percent in June. In the UK, data out on Wednesday is expected to show headline CPI inflation eased to 10.9 percent in November from a 41-year high of 11.1 percent last month.
Jennifer McKeown, global chief economist at Capital Economics, said that while inflation may fall “significantly lower” next year, there are question marks over whether inflationary pressures will moderate in line with the central bank’s targets. 2 percent.
In the eurozone, core inflation – which does not include changes in the price of energy, food and tobacco – remains at a high level of 5 percent in November. In the US, the primary rate dipped by just 0.3 percentage points to 6.3 percent in November, from a 40-year high last month.
Nathan Sheets, global economist at Citi, said persistent inflation in the services sector, combined with a stable, albeit slow, rate hike and recession, would be “bad news for next year”.
Maintaining monetary tightening is set to prove more and more of a communication challenge for central bankers as economies on both sides of the Atlantic shrink – in part because of the jumbo rate hikes that central banks have made over the course of 2022.
Officials now seem more prepared for the risks associated with pressing the economy harder. Jay Powell, chairman, said that while the Federal Reserve will do what is necessary to return inflation to the 2 percent long-term target, the central bank does not want to absorb demand excessively and drive the US economy into recession.
“My colleagues and I don’t want to push ourselves too hard,” he said at an event organized by the Brookings think tank late last month.
But the risk that inflation could stop falling to levels much higher than 2 percent will lead the Fed to raise the benchmark policy rate by half a percent on Wednesday.
The decision, which will raise the federal funds rate from the target of 4.25 percent to 4.5 percent, comes after four straight increases of 0.75 percent.
Investors betting that the Fed could cut rates in 2023 are likely to see those hopes dashed, despite a slowdown in inflation. Fed officials have indicated that rates will remain at “high levels” through the coming year.
Other central banks, including the Bank of England and the European Central Bank, are also expected to slow the pace of their rate hikes later this week – while remaining serious about bringing inflation under control.
The BoE on Thursday is set to raise interest rates by 0.5 percent to 3.5 percent, indicating that the war against prices and rising wages is not yet over.
Several members of the ECB’s governing council have said in recent weeks they expect to settle for a 0.5 percent hike on Thursday, not least because the bloc’s economy is in recession and policy rates are already at their highest level since fiscal 2008. problem.
The decision follows an increase of two consecutive points of 0.75 which took its deposit to 1.5 percent.
Observers expect ECB president Christine Lagarde to push back against the idea that interest rates will remain at the 2 percent level they may reach this week. “Next week’s drop to 50 points is likely to be coupled with a clear message that the job of tightening is far from over,” said Sven Jari Stehn, European economist at Goldman Sachs.