Inflation Concerns Persist: As we march into the future, inflation remains a formidable concern for the world economy, with over 75% of the 200 economists surveyed by analyst suggesting that the key risk is an inflation rate higher than their initial forecasts. This apprehension implies that interest rates will likely stay elevated for an extended period.
While several central banks were expected to begin easing rates by mid-2024, a growing number of economists now predict a delay, with rate cuts not arriving until the latter half of the year. This shift in expectations is a significant departure from early 2022 when some investment banks were forecasting rate cuts from the U.S. Federal Reserve right about now.
Despite achieving relative success in taming inflation, the challenge now lies in maintaining a rate that aligns with central banks’ targets. The latest poll, conducted from October 6 to October 25, revealed downgrades in growth forecasts for 2024 and upward revisions in inflation projections across the majority of the 48 economies surveyed worldwide.
A notable 75% majority of respondents (171 out of 228) to a separate question suggested that the risk associated with these elevated inflation forecasts leans towards the upside, with only 57 respondents taking the opposite view.
After a stunning third-quarter growth of about 5% (annualized), the U.S. economy proved its superiority over most of its peers. Christine Lagarde, president of the European Central Bank, warned that contemplating rate decreases is “totally, totally premature” after the ECB ended a ten-meeting tightening streak.
For most of this year, central banks like the Fed and ECB have advocated for “higher for longer” interest rates, but economists and market traders have remained wary. Douglas Porter, BMO’s chief economist, said, “Our forecast is that the Fed has done enough and they don’t have to raise rates further, but I haven’t closed off the possibility we could be wrong and the Fed does ultimately have to do more.”
Also Read: Eurozone Experiences Lowest Inflation in 2 Years Amid Economic Deceleration.
Last month, almost 70% of respondents believed the Fed would decrease rates by mid-2024, but only 55% do now. Rate cuts by the Reserve Bank of New Zealand, a rate cycle bellwether, are expected to wait until July-September 2024.
A growing majority now anticipates no rate cuts until the second half of 2024 for central banks like the Reserve Bank of Australia, Bank Indonesia, and the Reserve Bank of India. Even the Bank of Japan, which has steadfastly clung to ultra-loose policy throughout the inflation debates, is now expected to abandon negative interest rates next year.
Crucially, most economists agree that the initial easing measures will not lead to a rapid succession of rate cuts. When asked about the factors that would prompt the central bank they cover to make the first rate cut, a significant majority of 149 out of 219 respondents (over two-thirds) stated it would be to make real interest rates less restrictive as inflation subsides. The remaining 70 respondents believed the first cut would signify a shift toward stimulating the economy, indicating that only a minority anticipate severe economic and inflationary pressures necessitating a monetary response.
The forecast for global economic growth points to a slowdown to 2.6% next year, down from an expected 2.9% in the current year. Nathan Sheets, Global Chief Economist at Citi, highlighted the influence of high interest rates as a tool to combat inflation and its restraining impact on economic activity. He remarked, “It’s certainly restraining activity, and it’s going to be a while before we get global growth above what has been its historical average.”
Our Reader’s Queries
Why has inflation been so persistent?
Persistent inflation is often caused by second-round effects. During this period, producer prices have risen significantly and have not yet been fully passed through the value chain. Additionally, nominal wages have already increased or are expected to do so this year. These factors contribute to the persistence of inflation.
How long can we expect inflation to last?
Although inflation has decreased from its peak of 9.1% in June 2022, the central bank anticipates that it will not meet its target until 2026 at the earliest.
What are the concerns of inflation?
Fixed interest rates can be distorted by inflation, affecting both recipients and payers. For instance, pensioners who receive a fixed 5 percent yearly increase to their pension may experience a decline in their purchasing power if inflation exceeds 5 percent. This highlights the importance of keeping inflation in check to ensure that fixed interest rates remain effective.
Why would inflation continue to be a problem in 2023?
Although gas prices played a role in slowing down inflation last month, there are other factors that are pushing it up. One of the major contributors is the cost of shelter, which includes housing and rent. In fact, rent prices have increased by 6.9% over the past year, which is keeping inflation on the rise.