A Look at Global Inflation Rates: Where We Were and Where We Are Headed

A Look at Global Inflation Rates: Where We Were and Where We Are Headed

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The inflationary picture remains a prominent global concern and a widely discussed topic for many financial analysts, economists, investors and traders. Understanding the current trends and potential future trajectory of inflation requires exploring a little bit of the historical background and examining the factors shaping its projected course. 

Where We Were?

Since circa 2010, the US experienced stable prices according to the nominal annual inflation rate (the Consumer Price Index [CPI]), fluctuating broadly around the US Federal Reserve’s 2.0% inflation target. Things changed rapidly in early 2020 when the COVID-19 pandemic began to emerge, causing supply chain issues that naturally elevated prices for goods and services. A similar picture unfolded for many economies globally. The global energy market also experienced a surge in energy prices (think gas prices and oil prices), further fuelling inflation. Factors like increased demand for oil and gas, coupled with geopolitical tensions, particularly in Europe, contributed to this rise (the war between Russia and Ukraine, for example).

However, elevated inflationary pressures did not begin to show until mid-2021; April’s year-over-year headline measure reported an increase of 4.2% in the US. This is double the inflation target. And, as of March 2022, in the space of just one year, inflation had doubled once more to 8.5%, and a high of 9.1% was observed shortly after in mid-2022, its highest level since the 1980s!

As shown on the line chart, this was also the case for most developed economies. The UK and the euro area reached peak inflation rates of 11.1% and 10.6% a little later in October 2022, respectively. You may also acknowledge that Australia and New Zealand topped at 7.8% and 7.3%, respectively, in the second half of 2022.

The consequences of rising inflation are far-reaching, impacting individuals and economies alike. Reduced purchasing power, particularly for essential goods and services, can lead to a decline in living standards. Businesses face challenges due to rising input costs, potentially impacting profitability and investment decisions. Additionally, central banks are forced to implement monetary policy tightening measures, such as raising interest rates to combat inflation, which can have implications for economic growth.

Where Are We Now?

Since inflation peaked, most developed economies have experienced a disinflation process. To be clear, this is not a decline in inflation; it is inflation (consumer prices) rising at a slower pace when comparing the current month to a month a year prior (if considering the year-over-year CPI inflation). For the purpose of this article, we have not included underlying inflation (core inflation, which strips out food and energy prices), though this has equally exhibited a disinflation process.

In the US, according to the latest reports, CPI inflation eased from its peak of 9.1% to 3.1% on a year-over-year basis, increasing the odds of a soft-landing story (lowering inflation without causing a recession). Inflation is still above the central bank’s inflation target of 2.0%. Similarly, for the UK (the euro area), CPI inflation cooled from 11.1% (10.6%) on a year-over-year basis to 4.0% (2.8%).

Where Are We Headed?

While it is clear that major economies are in a disinflationary phase, the US economy has proven incredibly resilient. Not only is Q4 2023 economic activity north of 3.0% (quite remarkable given the UK is in a technical recession and growth in the euro area is stagnating), but non-farm employment growth also remains healthy along with low unemployment, which are two potential barriers hampering the Fed from reaching its 2.0% inflation goal. Although inflation expectations suggest continued disinflation, this will hinge on the labour market for the US, as well as other major economies; if job growth and wages remain high, the task of reaching the 2.0% inflation target will be more difficult. 

While major central banks were embarking on a journey of tightening monetary policy during 2022 and 2023 to tame runaway inflation, expectations have shifted to one of policy easing in 2024. As of writing, the Federal Reserve is anticipated to cut rates three times this year, according to both the Fed in its latest projections (the Summary of Economic Projections [SEP]) and the futures market (75 basis points). The European Central Bank (ECB) is expected to cut its benchmark rates around four times (100 basis points) by the year-end and the Bank of England (BoE) is forecast to cut its Base Rate by approximately 62 basis points, or nearly three 25 basis point cuts over the course of the year. The point is that all central banks are anticipating the same thing. 

The question, however, is who cuts first and by how much—this will highlight possible trends to take advantage of in the financial markets!