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Flossbach von Storch : “The Last Mile of Inflation”
Macro

Flossbach von Storch : “The Last Mile of Inflation”

Flossbach von Storch’s latest outlook underscores the delicate balance central banks face in reaching the inflation target.
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5 FEB, 2024

By Johanna Zidani from RankiaPro Europe

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The past year has highlighted the intricate connection between various asset classes and the pivotal role of interest-rate developments, not only for bonds but also for equity markets. Flossbach von Storch emphasizes the significance of central bank policies, specifically focusing on the direction and potential extent of easing as we enter the New Year.

Central Banks' Dilemma: Balancing Inflation and Market Expectations

The freedom of central banks to navigate the economic landscape depends on the pace and sustainability of inflation approaching the 2% target. Despite recent progress in the fight against inflation, the victory is not guaranteed. In December, the eurozone saw a modest rise of 2.9% in consumer prices, below the 3% mark for three consecutive months. However, core inflation, excluding food and energy, remained at 3.4%, posing a challenge to reaching the inflation target.

In the USA, the battle against inflation has shown positive results, with the overall inflation rate dropping from 6% to 3.4% in December. Yet, a robust US economy, boasting an annualized real growth of 5.2% in Q3 2023, poses a hurdle to a slowdown in inflation. The central banks, both in Europe and the US, caution that the last mile toward the inflation target is the most challenging. They aim to temper investors' expectations, emphasizing the need for caution due to lingering core inflation rates, a strong labor market, and persistent wage pressure.

Divergent Paths: Fed's Leverage and ECB's Caution

The US Federal Reserve (Fed) benefits from operating at a relatively high interest-rate level, allowing room for potential rate cuts when the labor market cools. With a key interest rate of 5.5%, approximately two percentage points above inflation, the Fed has leeway for gradual adjustments. Meanwhile, the European Central Bank (ECB), trailing the Fed's interest-rate cycle, is expected to exercise caution, especially considering lower interest rates in the eurozone. The ECB's data-dependent approach awaits further economic indicators to assess inflationary pressures and the sustainability of the decline.

In conclusion, the last mile on the road to the inflation target poses challenges for central banks globally. Navigating this delicate phase requires a delicate balance between addressing inflation concerns and managing market expectations, with the Fed and ECB taking divergent paths based on their respective economic landscapes. Investors remain attentive to the unfolding developments in inflation, central bank policies, and the overall economic outlook.

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