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Macroscope | 4 reasons it’s too early to declare victory over inflation
Central banks might have kept interest rates too high for too long. Cutting them too quickly could prove even more costly
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The facts speak for themselves. In September 2022, inflation in the United States and the euro zone stood at 8.2 per cent and 9.9 per cent respectively. Fast forward two years and consumer prices in both economies are below 3 per cent, only slightly above the 2 per cent inflation target.
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Inflation in developing countries has also fallen sharply. The average inflation rate in emerging markets, weighted according to the size of the economy, has fallen from 7.6 per cent to 3.8 per cent, according to data from JPMorgan.
If China and Turkey are excluded – the former is battling deflationary pressures while the latter is contending with an inflation rate of more than 50 per cent – the average rate stands at 4.2 per cent.
The findings of Bank of America’s latest global fund manager survey on August 13 revealed that a net 76 per cent of respondents believed inflation would be lower in 12 months’ time. Moreover, a recession in the US has supplanted higher inflation as the biggest “tail risk” in markets, showing the extent to which the balance of risks has shifted.
Several major central banks, including the European Central Bank and the Bank of England, have already begun reducing interest rates. At the annual gathering of central bankers in Jackson Hole, Wyoming, on August 23, US Federal Reserve chair Jerome Powell said “the time has come for policy to adjust”, not just because inflation was close to the target but also because of emerging cracks in the labour market.
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The Fed, which is widely expected to start lowering borrowing costs later this month, deserves some of the credit for bringing inflation down without causing a recession. Although the recent rise in unemployment could be the prelude to a sharper downturn, the fact that a soft landing is still seen as the most likely scenario for the US economy is a remarkable feat given the degree of monetary tightening and the steep decline in inflation.
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