The long and winding road to lower inflation

Key takeaways

Last week was all about economic updates, with growth in the UK economy barely keeping its head above water, and some mixed updates on inflation in the US and China.

• News emerged last week that the UK economy had rebounded modestly in November (growing by 0.3%), following an economic contraction (of -0.3%) in October. In order for the UK to avoid economic contraction for the fourth quarter of 2023 overall, economic growth in December will need be at least flat (0%). This currently looks unlikely: the UK economy remains weak, flirting with an economic slowdown. This outlook supports the idea that the Bank of England will need to cut interest rates in 2024 in order to encourage the conditions for better economic activity.
• Meanwhile, US inflation (measured by the Consumer Price Index, or CPI) was slightly higher than expected in December. However, the ‘supercore’ version of this data, which strips out volatile priced items like food and fuel as well as the cost of shelter (such as rent), was in line with expectations. We know that this version of CPI is one of the US central bank’s preferred measures.
• It’s important to remember that moving away from high inflation is a journey, and the last mile of that journey (i.e. reaching the central bank’s 2% target) could be the hardest. As a result, bond markets took the latest US inflation data in their stride last week. The general market view remains that inflation globally (including in the US) will continue to fall during 2024.
• One of the factors helping inflation downwards is the deflationary pressures which are effectively being exported from China. Despite some ‘reshoring’ and ‘nearshoring’ of global manufacturing processes in the wake of the COVID-19 supply chain crises, China remains a global manufacturing giant. According to data released last week, China’s factory gate prices (measured by the Producer Prices Index, or PPI) and inflation (CPI) both fell in December, and this disinflation is then passed on to the rest of the world through international trade. December marked the third consecutive month of deflation in China, and while it presents a conundrum for Chinese policymakers, it is certainly helpful for global inflation.

Weekly market moves

• Global share prices rose last week, largely driven by positive performance in the US stock market. Japan has also begun the new year strongly, while Europe, the UK, and developing economies have been lacklustre so far in 2024.

• In bond markets, UK government bonds have given back some of last year’s hard-won gains, with bond prices falling and bond yields (which always move in the opposite direction to prices) rising.

• Commodity markets have been muted, with the price of gold falling a little and the oil price continuing to drop despite varied geopolitical turmoil in the Middle East.

What to look out for this week

• Leaders from around the world are currently meeting at the World Economic Forum in Davos, with an agenda aimed at using international cooperation to navigate the complex global landscape.

• More economic data is due for release throughout the week, including US retail sales, Chinese economic growth, and UK and Japanese inflation.