Asset Management: Monthly Macro Insights - April 2024

Recent data suggest that inflation could prove persistently high for some time and limit the room for central bank easing. Despite this high-for-long path for policy stances, investors remain convinced it will not prove sufficient to derail global growth.

Goods disinflation taking a pause…

Last year, inflation has been falling quickly from its 2022 peak, with a smaller-than-expected toll on employment and activity. However, following a material downshift from 5 per cent annual rate in H1 2023 to 3 per cent in H2 2023, core CPI in advanced economies picked up in Q1 2024. Indeed, sliding core goods inflation contributed materially to the downtrend last year, but this disinflationary impulse has been fading in the past few months for several reasons.

First, the weakened global manufacturing sector shows signs of recovering. In addition, despite recent stabilisation, container shipping rates are still double their earlier December levels. Compounding the rebound in core goods, energy prices are also turning higher after being a significant drag on headline inflation in 2023.

… while services inflation is sticky

Meanwhile, services inflation remains elevated, both relative to pre-pandemic norms and relative to goods inflation amid elevated unit labour costs and tight labour markets.

Productivity is a wild card

Combined with weak productivity, strong wage growth will most likely sustain price pressures in services, where labour has an outsized impact on final costs. Yet, the awakening of the US’ productivity entails that output and income could grow quickly without putting upward pressure on inflation.

The complicated last mile

The loosening in financial conditions in the past five months coincides with the improvement of business confidence surveys in both the manufacturing and services sectors. This points to a gradual recovery in most advanced economies over the course of 2024, while growth is expected to remain robust in the US. Yet, the resilience of the economy is another reason why the speed of the final descent of inflation to target is highly uncertain. Central bankers may thus decide to be patient and hold their policy rate at the current restrictive stance for longer than previously thought, to help keep inflation on a sustainable trajectory toward targets. After all, the risk of waiting a little longer to ease policy seems small and significantly lower than acting too soon and possibly squandering the progress on inflation.