A further fall in US inflation on Tuesday and more modest rate hikes by the world’s major central banks later in the week will set the tone for a new chapter in the global economy.
Headline inflation data in most economies will continue to improve in the coming quarters as increases in energy and food costs drop out of annual calculations over the course of 2022.
But policymakers at the major central banks will fear the rate hikes will continue faster than they’d like – and remain open to more rate hikes to show they’re serious about bringing inflation back to pre-coronavirus levels bring to.
Silvia Ardagna, chief economist for Europe at Barclays Bank, said: “Inflation is slowing and the pace of rate hikes is slower, but central banks will still rise by larger amounts than [the 0.25 percentage points we have been used to] historical.”
US headlines, to be released later today, are expected to show a slowdown to 7.3 percent in November, from 7.7 percent in the previous month and well below the June peak of 9.1 percent. In the UK, data released on Wednesday is expected to show that headline CPI inflation slowed to 10.9 percent in November from a 41-year high of 11.1 percent in the previous month.
Jennifer McKeown, global chief economist at Capital Economics, said that while inflation is likely to come down “much lower” over the next year, there are big question marks over whether price pressures will ease in line with central bank targets of around 2 percent .
In the eurozone, core inflation – which excludes changes in energy, food and tobacco prices – remained at an all-time high of 5 percent in November. In the US, the core metric fell just 0.3 percentage points to 6.3 percent in November, from a 40-year high the previous month.
Nathan Sheets, Citi’s chief global economist, said persistent service-sector inflation, combined with sustained, albeit slower, rate hikes and a rolling recession are “the bad news for next year.”
Maintaining monetary tightening will increasingly prove a communication challenge for central bankers as economies on both sides of the Atlantic shrink — in part due to the huge rate hikes central banks have undertaken throughout 2022.
Officials now appear more attuned to the risks of pushing the economy too hard. Jay Powell, the chairman, said that while the Federal Reserve will do whatever is necessary to bring inflation back to its long-term target of 2 percent, the central bank does not want to unduly dampen demand and push the US economy into recession .
“My colleagues and I don’t want to overtighten,” he said at an event hosted by the Brookings Institution think tank late last month.
But the threat that inflation could plummet to levels far higher than 2 percent will prompt the Fed to hike interest rates by half a percentage point on Wednesday.
The decision to raise the federal funds rate to a target range of 4.25 percent to 4.5 percent comes after four consecutive 0.75 percentage point increases.
Investors betting that the Fed could cut rates in 2023 are likely to dashed those hopes despite the slowing pace of rate hikes. Fed officials have signaled that interest rates will remain at “elevated levels” for the next year.
Other major 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 they are serious about bringing inflation under control.
The BoE will hike interest rates by 0.5 percentage point to 3.5 percent on Thursday, signaling that the fight against price and wage increases is not over.
Several ECB Governing Council members have said in recent weeks that they expect to agree on a 0.5 percentage point hike on Thursday, not least because the bloc’s economy is on the brink of recession and interest rates are already on the cusp highest level since the 2008 financial year.
The decision follows two consecutive 0.75-point hikes that have brought the deposit rate to 1.5 percent.
Observers also expect ECB President Christine Lagarde to balk at the idea that interest rates will remain at the 2 percent level they are likely to reach this week. “The move down to 50 basis points next week will likely come with a clear message that tightening is ongoing,” said Sven Jari Stehn, chief economist for Europe at Goldman Sachs.