Inflation Has Moderated in the U.S., But Persists in Other Developed Economies

January 24, 2024

Consumers in the U.S. have gotten a break in recent months, as inflation retreated from the highest level in decades. The final consumer price index (CPI) report of 2023 showed that prices rose 3.4% annually in December. American investors believe that inflation is on track to continue its moderation and look forward to the Federal Reserve cutting interest rates as soon as March. 

Unfortunately, inflation in the rest of the world’s developed economies is proving to be “stickier,” complicating plans from other central banks to cut rates.

Consumer prices in the U.K. accelerated unexpectedly in December, potentially pushing back plans for interest-rate cuts at the Bank of England (BOE). CPI in the U.K. rose 4.0% annually in December, up from 3.9% in November. Economists polled by the Wall Street Journal expected inflation to ease to 3.8%.

More worryingly, core inflation, which strips out the volatile changes in energy and food prices and is considered a more accurate indicator of inflationary pressure, remained higher than the headline rate at 5.1% annually in December, higher than consensus expectations of 4.9%. A Reuters poll of economists shows no chance of interest rate cuts at the next BOE meeting in February and only a slim chance of cuts before the middle of 2024. 

The European Union snapped a five-month streak of falling consumer prices in December, with annual inflation jumping to 2.9%, up from 2.4% in November, according to Eurostat, the EU’s statistics agency. The increase was widely expected and mainly driven by energy costs, which were slower to fall in December than in November. Despite the rebound in inflation, the markets are signaling that the European Central Bank may cut interest rates in April.

Canada also saw inflation rebound in December, with CPI climbing at an annual rate of 3.4%, up from 3.1% in November. The Bank of Canada expects 2024 to be a year of transition for the economy as the effects of past interest rate increases that took its policy rate to a 22-year high of 5% continue to take hold, restraining spending and subduing economic growth. According to the central bank’s most recent economic forecast projects that inflation will remain elevated at around 3.5% until the middle of the year and will only return to target levels in 2025, making it unclear when interest rates in the country will begin to be cut.

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