The US leads the downward trend, with headline inflation falling back to 4% Year on Year (from over 8% in Q4 2022) and set to drop further over the next few months. Core inflation had proved stickier, but even here there is encouraging news. Most economies are moving in the right direction, albeit more gradually than the US, with the UK a clear laggard.

What has increased our confidence in the inflation trajectory?

  • Supply chains have reverted towards normality, as economies have reopened, and consumption has slowed from its breakneck pace.
  • A wide range of commodity prices have fallen back sharply, with energy in particular reversing a large part of the gains seen during 2022.
  • Food price inflation has also eased.
  • Monetary growth is beginning to contract in a number of regions.
  • Input prices, as measured by producer prices, are moving into deflationary territory even in the UK.
  • Goods price inflation has eased sharply.
  • Rental and used car prices have eased.
  • Lower energy and food prices will eventually feed through into core prices as well.

What still worries us?

  • The strength of the labour market (although trends are improving).
  • Wage growth is still higher than before the pandemic, although again, the trend is encouraging. The UK is an area of concern, largely due to domestic factors that may well place further upward pressure on wages.
  • Geo-political forces have pushed commodity prices higher again. Unlike the immediate post-lockdown period however, there is far greater risk that further rises could push consumers and corporates into contraction, counteracting the impact of higher input prices.

A shift towards lower inflation seems well on course, with the US likely to hit target by around mid-2024. The UK causes us most concern due to obvious supply chain and labour market issues that could keep inflation sticky. But there is reason to hope that inflation will finally ease towards 5% in coming months as lower energy and food costs push headline prices lower.


To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q3 2023 here.

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