In recent days, comforting data has arrived on the inflation front on both sides of the Atlantic, so much so that Bank of America analysts have dubbed the week just ended “(dis)inflation week“, stating that the data that emerged supports the expectations that the two main global banks by influence – i.e. the Federal Reserve American and the European Central Bank – will begin cutting interest rates in the first half of 2024. These hypotheses come after a cycle of monetary tightening that has not been seen for decades with the high cost of money slowing down the economy, especially in the Old Continent, while the American economy seems more resistant.
Inflation in the Eurozone
As regards the Old Continent, on Thursday Eurostat (i.e. the statistical office of the European Union) announced that the flash estimate on theoverall inflation in the euro area fell to 2.4% annually in November 2023 from 2.9% in the previous month, falling more than analysts expected (2.7%) and stabilizing at a low since July 2021.core inflationi.e. the one that does not take into account the most volatile components, moderated to 3.6% from 4.2%, also in this case decreasing at a faster rate than market expectations (3.9%).
Intesa Sanpaolo analysts pointed out that “once again, the trend decline concerns all the main components“, and highlight some aspects, such as the fact that non-energy industrial goods fell below 3% for the first time since February 2022 and that “an important good news came from the services“, which fell significantly in November, to 4% (-0.9% m/m) from 4.6%.
The November data therefore gives rise to hope for a possible rate cut by the ECB, but it is added that “although the glass is half full, the path of inflation will not be without pitfalls” and “the balance of risks on the expected inflation profile still tilts, albeit to a lesser extent, upwards due to possible new shocks on the more volatile components (energy and food)”.
The PCE in the USA
What provided relief to investors in the United States was not inflation in its standard measure, i.e. the consumer price index, but another data, however much observed by the central bank. It's about the personal consumption (PCE), which according to the Bureau of Economic Analysis increased by 0.2% in October 2023 after +0.7% in the previous month and hit what analysts estimated. The PCE price index core showed a positive change of 0.2% on the month (compared to the +0.2% expected and +0.3% recorded the previous month) and 3.5% on the year (+3.7% the previous month, +3.5% expected).
On the same day it also emerged that the recurring requests for unemployment benefits in the United States they jumped to the highest level in about two years, highlighting a cooling of the labor market.
“We have modest growth and a cooling of inflation and the labor market – exactly what the Fed wants to see – commented James Knightley, Chief International Economist of ING – This should confirm that no further tightening of Fed policy is necessary”. The Dutch bank's economist expects the Fed to cut rates from the second quarter onwards.
The most optimistic estimates on rates
These data, as mentioned, have led analysts to hypothesize interest rate cuts even earlier than previously expected, despite the central bankers – in their recent public releases – are continuing to repeat that it is premature talk about reducing rates and reversing the monetary tightening process.
Both US PCE and euro area core inflation showed “a consolidation of the disinflationary process,” which supports the expectation that the Fed and ECB will begin easing rates in June 2024; however, “a early cut by the ECB is no longer unthinkable“, said Claudio Irigoyen and Antonio Gabriel, Global Economist at Bank Of America.
Focusing on Europe, Nadia Gharbi, Senior Economist at Pictet Wealth Management, said instead that “from a monetary policy point of view, the November data will be very difficult for ECB hawks to ignore. It's a fact: inflation is falling much faster than the ECB predicted, thus increasing pressure to cut rates. We have forecast a first rate cut for June 2024, but the risks are oriented towards a closer date.”
