The "confidence" of the market betting on interest rate cuts: Inflation is falling too fast
Global inflation data has come in lower than expected, with core annual inflation in many countries also falling below expectations. The main factor driving the decline in inflation is the downward trend in energy prices. In the Eurozone, inflation data has dropped to 2.4%, far below the peak of 10.6%, which is a larger decline than what the market had anticipated. Inflation data in several countries, including the UK, Eurozone, US, Mexico, and Australia, has been lower than expected. Energy inflation has fallen by over 11% for two consecutive months. Core annual inflation in many countries, excluding food and energy, has also been lower than expected, including in the US, UK, Indonesia, and Japan.
It seems that just yesterday, major financial media outlets were reporting on soaring global inflation. However, it appears that there may be a "180-degree turn" in the future.
In October, inflation data in many countries was lower than expected, significantly decreasing from its peak earlier in the year. The latest data is particularly noteworthy: Eurozone inflation in November dropped to 2.4%, far below the peak of 10.6%, which exceeded market consensus.
Compared to economists' predictions from media surveys, 53% of inflation data in October was lower than expected, including the UK, Eurozone, US, Mexico, Australia, and other countries, while 25% of the data met expectations.
In many countries, the decline in energy prices is the main factor driving the decrease in inflation. For example, in the Eurozone, energy inflation has fallen for two consecutive months by over 11%, and energy inflation in the UK in October dropped to -15.7%.
Even when excluding food and energy factors, core annual inflation (excluding food and energy) in many countries is lower than expected, including the US, UK, Indonesia, and Japan.
Preliminary data for November shows that this trend is becoming even more apparent. 78% of the data is lower than predicted, such as Italy's unexpected drop in inflation to 0.7%, far below the European Central Bank's target of 2%. In addition, Belgium has experienced deflation for two consecutive months.
Kamil Kovar, Senior Economist at Moody's Analytics, pointed out in the Eurozone:
"People may soon be talking about low inflation rather than high inflation."
Against the backdrop of consistently higher-than-expected inflation over the past year, policymakers have repeatedly raised their inflation forecasts. Taking the Bank of England as an example, in multiple monetary policy reports over the past two years, the average inflation forecast for the last quarter of 2024 has been adjusted. In August 2022, the forecast was 1.4%; in February of this year, it was raised to 2.1%; and in the latest report in November, it was further raised to 3.4%.
Some economists believe that central banks may continue to maintain a high-interest-rate policy for some time. This is because they are still concerned about strong wage pressures and do not want financing conditions to be relaxed too early.
However, the market seems to have taken action in advance, expecting major central banks to cut interest rates early. Hargreaves Lansdown's senior investment and market analyst, Susannah Streeter, has warned that if inflation continues to remain below expectations, central banks may eventually adapt to market expectations:
"Central banks have made misjudgments in inflation expectations before, and although they initially resisted, they eventually adjusted their policies to align with market expectations."