In the second half of 2023, there was a significant drop in both headline and core prices across most economies, although a bumpier ride in the first half was inevitable and US inflation has surprised marginally on the upside over the past couple of months. However, the underlying disinflationary forces remain intact, with goods price inflation and crucially, service sector prices implying lower price pressures in the second half of the year. The upside has largely emerged from energy and rental prices in the US, but there are clear indications that the latter should begin to ease materially in coming quarters. The key PCE inflation data, which is the personal consumption expenditure price index, is also expected to ease in the coming quarters.
In stark contrast to the US, inflationary pressures have continued to recede across most other major economies. In Canada, the headline consumer prices have stayed within the target range of 1-3%, with a year-on-year increase of 2.8%. The trim index, which excludes extreme price movements, has also eased and is nearing the target range. Given the below potential growth rates, inflation is expected to decrease even further in the upcoming quarters.
Inflation has also surprised on the downside in the UK, and it is likely that the annual rate will fall below the 2% target in the next quarter. The weak economic conditions, lower wage growth, reduced energy price caps, and significant retailer discounts contribute to this downward trend.
Euro Zone inflation is also set to ease in the next quarter for similar reasons – slower economic growth and reduced price pressures.
In conclusion, while the US experiences marginal surprises on the upside, most major economies are witnessing receding inflationary pressures.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q2 2024 here.
