Inflation cools as central banks shift focus to rate cuts

From a JP Morgan Private Bank note from Wednesday, a couple of snippets, in summary, on inflation and the Federal Reserve. 

One of the biggest surprises this year has been how much inflation has cooled alongside that economic resilience. While inflation isn’t back to the Fed’s 2% sweet spot, 40% of the Consumer Price Index’s components are now at or below that coveted level.

  • The last mile of progress may still take some time, but the stickiest drivers of inflation—namely the still-hot clip of wage growth and rent prices—have ample room to continue cooling.
  • This gives us the confidence that central banks are probably finished hiking and seem to be in their “higher for longer” era.

Since the three major developed market central banks (the Fed, ECB, BoE) started hiking to tame inflation, they’ve increased policy rates a cumulative 1,490 basis points. With all three now seemingly on hold, the prevailing debate is shifting to when the first rate cuts might come. Markets are currently pricing in a 70% chance of a Fed cut by its May meeting.

  • To be sure, the impacts of the rate hikes we’ve already seen will continue to work their way through the economy (which is what the Fed wants to see)

On wage growth and wage growth and rent prices having “ample room to continue to cool” seems an overly optimistic way of saying these are still way too high.

In separate news analysts at JPM have raised their forecast for UK 2024 GDP to 0.4% from previously at 0.2%

Cable update:

gbpusd chart update gdp forecast 23 November 2023

This article was written by Eamonn Sheridan at Source