As inflation prints drop, is it go-go-go on rate cuts? Markets seem to think so.
- US inflation fell to 3.4% in April, in line with expectations
- The European Commission revised its inflation projections lower, saying prices rises would slow to 2.5% this year
- Interest rate cuts appear to be edging closer
There was good news all round on inflation this week. It finally seemed possible that central bankers had pulled off a miracle, engineering a soft economic landing alongside slowing inflation. Certainly, markets are allowing themselves to dream, rising another 1% on the day after an already strong run.
The most important data came from the US, with inflation falling to 3.4% in April. This was in line with analysts' expectations. Important areas such as rents showed signs of weakness. Economists also took heart from the fact that a chunk of the rise came from high car insurance prices, which look set to drop over the coming months.
There was also good news on the economy, with retail sales weak, but not too weak. It suggests consumers are finally responding to higher prices, which may reassure the Federal Reserve that interest rates can drop without too much risk. Overall, the news appeared to keep multiple rate cuts on the table for the second half of 2024.
Amid all the excitement about the US data, better news from Europe was largely overlooked. The European Commission revised its inflation projections lower, saying prices rises would slow to 2.5% this year and reach the ECB’s 2% target in the second half of 2025. The catalyst for these revisions was better data on shipping costs. The Red Sea trade disruption has proved far milder than expected.
As in the US, inflation appears to be coming under control without a collapse in the economy. The latest data showed signs of a recovery across the region, with Eurozone GDP rising 0.3% over the previous quarter. However, economic growth is not likely to be strong enough to derail interest rate cuts from the ECB, which look increasingly nailed down for June.
This leaves the UK. Wage data remains persistently high, rising 5.7% in the first quarter. This may spook the Bank of England. On the other hand, unemployment continues to rise, and vacancy rates are dropping. Huw Pill, BoE chief economist, refused to give markets any cheer: “It’s clear that the job is not yet done — some restriction is still required, and the timing and extent of any cuts in bank rate will only be able to be assessed when we have more evidence.”
However, it is unlikely that the UK will hold out if Europe and then the US are set to drop rates. After almost a year of speculation, we may be finally edging closer to a rate cut across the major markets. Let’s hope it’s as good as investors expect.
