08/20/2024

Now that central bankers from all over the world are meeting in the American town of Jackson Hole for the annual Federal Reserve symposium, they can say with relief that the dynamics of global inflation seem to have turned in their favor.

Although it is too early to declare victory, the truth is that the fear of inflation that had dominated the debate on monetary policy since prices started to skyrocket during the pandemic has largely disappeared. Inflation may not be at its 2% target yet, but it's close and it's going in the right direction.

This optimism about inflation was validated last week by July's CPI figure in the US, which came in slightly lower than expected and generally confirms the positive trend in inflation.

Prices in other advanced economies were also encouraging. In the United Kingdom, July's inflation was also lower than expected, with the underlying rate at 3.3% year-on-year. Particularly well received was the data on inflation in services, which fell from 5.7 to 5.2%, well below market forecasts.

In the eurozone, July's CPI figures for the main countries were not as encouraging and, in general, showed prices stagnating somewhat. However, there are indications of a future deflation resulting from lower wage pressure.

In short, the global inflationary outlook has become more benign. There are still sources of persistent pressure on prices, but a significant resumption of inflation seems to be a limited risk at this time. In fact, deflationary trends in China could further reduce pressures on global prices.

However, as concerns about inflation abate, investors are shifting their attention toward economic growth. In the United States, last week's strong retail sales, combined with an unexpected drop in initial jobless claims, continued to alleviate concerns about a potential collapse in demand across the Atlantic. It is clear that growth is slowing down from very high levels, but activity remains solid and is not shrinking; however, the global growth outlook is more complex. In the eurozone, the gross domestic product grew by 0.3% in the second quarter of the year, confirming a mild recovery in activity after a year and a half of stagnation, although there are indications that cast doubt on the sustainability of this growth. In fact, the advance indicators continued to show a deterioration in the confidence of economic agents.

Even more worrisome is the situation in China, where July's macroeconomic data confirmed what was already an open secret: the Asian giant's economy continues to be immersed in a demand crisis and is experiencing a trend toward greater savings and lower wages and prices. More specifically, loans to the real economy shrank for the first time in 19 years. Meanwhile, industrial production slowed down, the contraction of real estate investment worsened and the growth of retail sales remained below 3% year-on-year. And it is against this backdrop that the central banks come into play. Now that inflation is under control and economic growth is slowing down, it seems appropriate to allow for some easing of the world's monetary policy. In fact, a reduction in the benchmark interest rates seems to be the clear path to follow now. In this regard, the symposium in Jackson Hole may give us insights into the upcoming activity of central banks, and the speeches by the top officials in charge of the world's monetary policy will be closely monitored by investors.