The temptation to “declare victory and retreat” must, among central bankers, run high. Since the Spring/Summer of 2022, their primary focus has been on bringing inflation back to target. On the basis of the latest inflation data, that has broadly been achieved. Three-month annualised rates of inflation (which give a more timely picture of developments than the year-on-year rates that are more commonly quoted) are close to 2%. That is as much of an achievement for the Bank of Japan – which fought deflationary pressures for more than three decades – as it is for the US Fed, the European Central Bank and the Bank of England which battled high inflation for less than three years.
It could be, of course, that this success does not last. Service sector inflation and wage growth are still elevated in the US, UK and eurozone. The current success in controlling inflation owes much to weaker goods prices – notably for energy. However, longer-term inflation expectations (on the generally-preferred measure – inflation over five years, five years ahead) have eased back. This is a welcome indication that inflation expectations have not become unanchored, as some feared just a short while ago.
Looking ahead, however, the route for the global economy may well resemble more of an obstacle race rather than a central bankers’ lap of victory. Three such obstacles are clearly evident.
To discover these obstacles and read more of our economic and market views, read our full Quarterly Market Review here.