Termed a Christmas miracle, global inflation is decelerating faster than anticipated, with expectations that this trend will persist into the coming year, returning inflation to normal levels for the first time in three years. According to Goldman Sachs economists, core inflation (excluding food and energy) in economies, including the U.S., Europe, and various emerging markets, ran at a 2.2% annualized pace over the three months ending November.
The analysts estimate that by the end of 2024, average inflation among this group will be close to or at the targets set by major central banks. This decline in inflation is anticipated to benefit economic growth by enhancing household purchasing power and providing central banks room to cut interest rates.
Forecasts from Michael Saunders at Oxford Economics suggest that inflation in the euro area will reach 1.3% in the fourth quarter of the next year, while the U.K. is expected to see 2.7% inflation. In the U.S., inflation is predicted to fall to 2.2%, measured by the Federal Reserve’s preferred index. These projections indicate a significant improvement compared to recent months.
Factors contributing to the decline in inflation include subdued goods prices due to global production disruptions, the resolution of supply chain issues, adjustments in energy and commodity markets following geopolitical events like Russia’s invasion of Ukraine, and rebalancing labor markets leading to cooling wage growth. These improvements are setting the stage for potential rate cuts in major economies in the coming year.
While inflation is calming globally, central banks are expected to respond with rate cuts in 2024, as indicated by the Federal Reserve’s recent signaling of potential interest rate cuts. This has already influenced bond prices and yields, lowering borrowing costs for companies and homebuyers. However, the timing and impact of these changes may vary across countries, with the Eurozone and the U.K. potentially experiencing delayed effects due to their dependence on banks and sticky inflation rates. Despite expectations of slower economic growth in 2024, rate cuts, cooling energy and food prices, and normalized supply chains are anticipated to prevent a global recession.