Inflation reverberations

The post-Covid inflation surge and accompanying jump in interest rates was a global phenomenon. There were a few important exceptions, notably China and Japan, but almost all other economies experienced broad and sustained price increases, as well as higher interest rates.

European countries such as Sweden and Switzerland abandoned negative interest rates, a dramatic reversal after years of sub-zero policies. Some emerging markets hiked early and aggressively, both in response to domestic inflation and to get ahead of the US Federal Reserve. American interest rates, after all, act as an irresistible gravitational force for global markets.

Blurred lines
Today, the picture is a bit blurrier. Inflation seems to be moving in different directions across the world, and with that, the policy stances of central banks. This has implications for investors.

Starting with the US, consumer inflation declined more than expected in June. This provided much cheer to markets, as it potentially reduces the need for substantial further interest rate increases from the US.

The consumer price index rose 3.1% from a year ago in June, excluding fuel and food at 4.8%. These are the lowest inflation rates since 2021 and indicate ongoing progress towards the Fed’s 2% target. Even some of the stickier items in the inflation basket seem to be coming unstuck.

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