All articles tagged with #disinflation
Federal Reserve policymakers are maintaining a wait-and-see approach due to concerns that the disinflation process may take longer than expected. Despite recent data showing a slowdown in inflation, the Fed remains cautious and is prepared to keep its restrictive policy stance if inflation does not move towards the 2% target. The central bank has kept its benchmark rate unchanged, and the odds of a rate cut in September are around 50%.
The closely watched 2-year/10-year Treasury yield spread, a key recession indicator, has become less negative due to disinflation rather than economic growth prospects, according to strategist Lawrence Gillum. The un-inverting curve and rate-cut expectations are driven by the narrative of inflation returning to 2% faster than expected, rather than recession fears. Despite geopolitical events affecting oil prices, the bond market is not currently signaling an impending U.S. recession, as indicated by fed funds trading.
Inflation in the United States has shown a surprising decline in late 2023, with a shift from rapid price increases to a more moderate pace, termed "disinflation." This trend is attributed to falling prices in goods like apparel and used cars, as well as service costs for travel, while rent increases are expected to slow down eventually. The Federal Reserve aims for a 2 percent annual inflation rate, and the current trends suggest that this target may be achievable by the end of 2024. However, risks such as volatile fuel prices and geopolitical tensions could still disrupt this progress. Economists are cautiously optimistic but acknowledge the potential for unexpected shifts in the inflation trajectory.
Global markets are experiencing a boost as disinflationary pressures drive record-breaking performances in stocks and bonds. The S&P500 and Nasdaq 100 are nearing all-time highs, while the tech giants have doubled in value this year. The drop in UK inflation has led to a surge in British markets and speculation of a rate cut by the Bank of England. This has also caused 10-year US Treasury yields to fall to their lowest since July. The bond boom has spread globally, with German and Italian yields reaching new lows. Despite some central banks pushing back against rate cut expectations, demand for long-duration bonds remains strong.
Disinflation and deflation are not the same for the economy. Disinflation refers to a decrease in the rate of price increases, while deflation means prices are actually falling. Disinflation allows the economy to continue moving forward, while deflation can lead to reduced consumer spending and layoffs. The Federal Reserve aims for a mild inflation rate of 2% annually to support economic growth. Although consumers have experienced elevated inflation in recent years, wages are starting to catch up, which is a positive sign.
Despite inflation cooling down, prices are still rising, leading to dissatisfaction among consumers. Easing inflation means prices are rising more slowly, not falling. Deflation, or falling prices, is generally not good for the economy as it can indicate economic distress. The Federal Reserve prefers rising prices at a moderate pace. While some prices have fallen, overall prices are still rising. Rising wages may help alleviate the impact of inflation on consumers.
China's disinflationary trend worsened in November as consumer prices fell at their fastest pace in three years, while producer prices remained in contraction for the fourteenth consecutive month. The weak readings raised concerns about the Chinese economy, leading to a decline in stock markets. The decline in consumer prices and weak business activity indicate little pick-up in consumer spending, despite government liquidity injections. Chinese businesses continue to face pressure from weak overseas demand, and the readings contradict recent statements from the People's Bank of China. Moody's has warned of a potential downgrade to China's credit rating, and investors are calling for more targeted fiscal measures to support the economy.
German inflation dropped to 3.2% in November, continuing the disinflationary trend. EU inflation data is expected to show further decline, with markets pricing in rate cuts in 2024. The European economy's lack of resilience compared to the US could accelerate economic headwinds, posing a threat to the Euro. The upward revision to US GDP growth overshadowed the inflation data, causing a pullback in the EUR/USD pair.
Most Asian stocks recovered slightly on Thursday, driven by positive earnings reports, although concerns over China's weak inflation data limited gains. Chinese stocks lagged behind as the country fell back into disinflation territory, indicating further economic weakness. Japan and Australia saw strong gains due to robust earnings, while South Korea and India also showed positive signs. However, hawkish comments from US Federal Reserve officials raised doubts about future interest rate hikes, and the weak economic outlook for China poses additional challenges for the region.
Two new inflation measures, the PCE price index excluding food, energy, and housing, and PCE services excluding energy and housing, indicate a continuing disinflation trend. The Federal Reserve is closely monitoring these core measures of inflation, which are considered better predictors of future inflation than headline measures. In the second quarter, the PCE price index excluding food, energy, and housing slowed to a 3% rate, while PCE services excluding energy and housing slowed to a 3.5% rate. Chair Jerome Powell highlighted significant declines in core inflation, particularly in the goods sector, housing services, and non-housing services. The broader core PCE price index for the second quarter remained unchanged at 3.7%.
Bond yields have retreated, boosting investor sentiment, as concerns about disinflation in the U.S. grow despite mixed signals globally. Both two- and 10-year Treasury yields fell below key thresholds, while stocks rallied on Monday. The drop in yields can be attributed to signs of declining U.S. inflation, including a drop in household inflation expectations and a decrease in used-vehicle prices. Additionally, a New York Fed survey showed that consumer credit plunged in May. While some bond market repricing may be due to an expected drop in U.S. CPI inflation, other factors, such as speeches from Fed officials and regulatory plans to increase capital requirements for U.S. banks, also influenced the market. The global inflation outlook remains uncertain, with China showing signs of deflation and the UK experiencing mixed economic signals.