Inflation to remain higher globally; central banks to cut interest rate – EIU

The Economist Intelligence Unit is warning that Inflation will settle higher globally owing to labour and trade changes.

According to its latest Global Outlook report, although the worst of the cost-of-living crisis is over, inflation is not forecast to return to the low trend of the pre-pandemic era.

“A tightening in labour markets, reflecting demographic changes and tighter immigration controls, will keep demand firm through higher wages.”, it said.

Meanwhile, it pointed out that the reshaping of supply chains, the wider application of tariffs and the likelihood of unpredictable climate conditions will apply upward pressure on prices. Inflation in developed markets is forecast to average 2.7% in 2024 and 2.3% over our five-year forecast period, up from 1.5% in the 2010s.

A major geopolitical confrontation would cause renewed price increases similar to what occurred in 2022, with a disproportionate impact on lower-income economies.

Fed, other central banks to cut interest rates

Meanwhile, the EIU has indicated that the US Federal Reserve will soon join other central banks in cutting interest rates.

According to the UK based firm, the strong economic performance of the US and relatively sticky inflation has delayed the first cut to interest rates by the Fed.

However, with US growth now slowing and labour market indicators deteriorating, it forecast that the Fed will reduce its policy rate in September 2024 and implement further two cuts before year-end (for a total of 75 basis points).

This will partially close a divergence that has emerged in global monetary policy, with the European Central Bank (ECB) and the Bank of England (the UK’s central bank) having started to reduce their policy rates in June 2024 and August 2024 respectively.

“Still, none of these central banks are expected to lower their policy rate below 2% over the next five years, with the Fed particularly constrained by trade and immigration policies that are likely to be inflationary under Mr Trump”, it pointed out.

In China, it said a loose policy stance will be maintained to fend off deflation risk, whereas the Bank of Japan (BOJ, the central bank) is forecast to gradually normalise policy after exiting its negative policy rate.