Macroeconomics, Geopolitics, and Strategy - January 2024

”The easiest part of the disinflationary trend is past, we now need to see moderation in the labour market to keep inflation around target.”

Recent Q4 2023 inflation data in the Euro Area, UK and US, on net have surprised on the downside, with year-over-year (YoY) rates of headline inflation now standing at 2.9%, 3.9%, 3.4% respectively, prompting expectations of a faster than expected reversion to target.

A rapid disinflationary trend, more dramatic in headline than in core, has been at work across Developed Markets (DM), helped by very favourable base effects on energy prices which are now set to progressively fade and become less prominent, if not marginally adverse. The expiry of the special measures implemented by national governments, particularly in Europe, to reduce the impact of the energy shock back in 2022 may temporarily lift the energy contribution to headline inflation and add to nearterm volatility. Thus, while the general disinflationary process is poised to continue (we expect goods prices to continue falling in 2024), we also believe that the “easier part” of the disinflationary process is past and that the path to bring core inflation back to target will require a substantial moderation in demand and growth. Though core CPI remains above target in all three regions – US (3.9%), UK (5.1%) and Euro Area (3.4%) – macroeconomic policy settings, especially monetary policy, are sufficiently restrictive to deliver this growth slowdown.

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