RBC BlueBay: Global inflation outlook

RBC BlueBay: Global inflation outlook

August 16, 2023

Inflation Outlook
Rente (04) inflatie

We are edging into a pause. Considerable headway has been made bringing headline inflation back down towards central bank targets, but core inflation remains far too elevated to see rate cuts this side of year-end.

We are entering a period of higher for longer interest rates, allowing time for hikes to become further restrictive and continue to feed into the economy. The Fed will only turn to cut once it is clear this has materialised.

We see the trigger as the first negative NFP (non-farm payrolls) print. However, how soon that will arrive continues to be pushed farther down the line as the strength of the labour market continues to surprise.

Times of extreme inflation are over, yes, but we have not yet reached the end of inflation above target. Headline inflation in the US will shift higher again from here back towards 4%, as the benefit of base effects has largely unwound.

The persistence of core inflation also remains a concern, running well above headline across economies globally. We expect both measures to return to target, but it may mean interest rates need to stay higher for longer. 

We are seeing monetary policy transmission feed through much slower than historical experience would suggest in this cycle across advanced economies. The post-pandemic period has been characterised by a weakening of transmission mechanism effectiveness through multiple channels.

The credit channel has to work through the unprecedented amount of stimulus measures provided during the pandemic before it becomes potent. The colossal transfer of wealth has buffered household balance sheets and eased liquidity constraints, effectively pushing out the point of discomfort.

In addition the asset price channel has been weakened by the additional wealth effects from the housing market boom – price gains of which are not expected to fully reverse.

A technical recession is coming for the US and the Eurozone economies, however, year-over-year growth will remain positive and the downturn should be shallow.

On the other hand, slower growth in China means the disinflationary impulse will continue to benefit the global economy via declining core goods inflation. The policy support measures introduced in China have acted to extend this trend by bolstering supply more than demand. This led to a collapse in Chinese export prices - the deflationary effects of which are amplified by the depreciation of the yuan.

We continue to see emerging market local rates as an attractive asset class. There has been a pick-up in rates volatility of late, which we think opens entry opportunities in the space. We think Central Eastern Europe looks interesting, such as Czech rates, which remain elevated and should benefit from strong disinflation over the course of the next months. Here we expect the CNB will have a dovish shift and begin discussing interest rate cuts into year end.

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