Increasing global price pressure threatens to lead to more rate hikes

Underlying price pressures are still mounting in most major developed economies, despite the recent decline in headline inflation, suggesting that central banks will need to continue to tighten policy in the coming months.

Core inflation — which rules out changes in food and energy prices, and is seen by ratemakers as a better measure of ongoing price pressures — is accelerating in many parts of the world, according to an analysis of official statistics by the FT.

Core interest rates continued to rise in November in most of the 33 countries tracked by the FT and remain well above the 2 percent inflation rate that most central bankers are targeting.

The number of countries where core inflation is rising has started to shrink in recent months, but it remains much more widespread than headline inflation. Only a third of countries saw aggregate interest rates rise between October and November.

“There is still the potential for a lot of pain ahead,” said Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown. “Sustainably high prices continue to cause major headaches for economies.”

Services inflation, another measure of the persistence of price pressures, remains close to multi-decade highs in several major economies, including the UK, the eurozone and the US.

Policymakers have aggressively raised interest rates this year in response to the rise in headline inflation measures, but have recently begun to scale back the magnitude of the increases.

Last week, the Federal Reserve, the European Central Bank and the Bank of England all chose to shift their anti-inflation strategies from a recent pattern of interest rate hikes of 0.75 percentage point to half a point in response to the apparent spike in headline inflation in many countries.

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Christine Lagarde, president of the ECB, said monetary tightening in the euro zone “still has some way to go” and that rate setters plan to continue raising borrowing costs in 50 basis point increments over the coming months.

Lagarde also acknowledged that underlying price pressures had increased and “would persist for some time” — a message echoed by Fed Chairman Jay Powell and BoE Governor Andrew Bailey.

Rising energy and commodity prices – a result of the war in Ukraine and severe supply chain disruptions amid the pandemic – drove the initial rise.

However, rising costs have since taken on a broader base, with high inflation in parts of the economy that have for years proved immune to price pressures. Wage growth, which had been subdued in most of the world’s major economies since the global financial crisis, has also picked up, particularly in the US.

With commodity prices stabilizing, headline inflation has fallen sharply in several economies, including the US, UK and the Eurozone.

Measures of underlying inflation have not been followed. The most commonly used measure of longer-term price pressures, core inflation, remains at a record high of 5 percent in the eurozone.

Silvia Ardagna, European chief economist at Barclays Bank, said policymakers at the ECB “would be concerned that we are not seeing any easing of inflation dynamics at the core level”.

In the US, services inflation is still at its highest level in 40 years, despite a two percentage point drop in headline inflation since the summer.

“Services inflation will be crucial in setting the path for policy rates,” said Ben May, director of global macro research at Oxford Economics.

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Last week, policymakers at the Fed acknowledged that core inflation would prove to be more stubborn than thought, and revised their forecast for next year to 3.5 percent, up from September’s forecast of 3.1 percent.

UK services inflation has also remained high, holding its highest level in 20 years in November, despite the easing of the nominal rate from 11.1% in October to 10.7%. The BoE said the persistence of services inflation “justifies a further strong monetary policy response”.

“Central banks in developed markets still have more work to do,” said Jennifer McKeown, chief global economist at Capital Economics.

Streeter said, “Inflation may have peaked, but that doesn’t necessarily mean it’s a smooth downward path from here.”

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