Inflation to dog world economy next year

High inflation will dog the world economy next year, with three-quarters of over 200 economists polled by Reuters saying the main risk is that it turns out higher than they forecast, suggesting interest rates will also remain higher for longer.

Several central banks are still expected to begin cutting interest rates by the middle of 2024, but a growing number of economists surveyed are adjusting their views, pushing the more likely date into the second half of next year.

This is a significant change from expectations at the start of this year. Then, some investment banks were predicting the US Federal Reserve, which sets the tone for many others, would be cutting rates right around now.

Despite broad success in bringing inflation down from its highs - the easier bit - prices are still rising faster than most central banks would prefer and hitting their inflation targets is likely to be tough.

The latest Reuters poll of over 500 economists taken between Oct. 6 and Oct. 25 produced 2024 growth downgrades and inflation upgrades for a majority of the 48 economies around the world surveyed.

A 75% majority who answered a separate question, 171 of 228, said the risk to these broadly-upgraded inflation forecasts was skewed higher, with only 57 saying lower.

The results follow news on Thursday the US economy unexpectedly grew nearly 5%, annualised, in the third quarter, underscoring how the strength of the world’s largest economy is setting it apart from most of its peers.

The survey results also follow a warning from European Central Bank President Christine Lagarde, who said after the ECB snapped a 10-meeting tightening streak that “even having a discussion on a cut is totally, totally premature”.

While many central banks, including the Fed and the ECB, have presented a “higher for longer” narrative on rates for the better part of this year, many economists and financial market traders have been reluctant to accept that view.

“I think all of us have to keep an open mind that maybe policy isn’t restrictive enough,” said Douglas Porter, chief economist at BMO.

“Our forecast is that the Fed has done enough and they don’t have to raise rates further, but I haven’t closed off the possibility we could be wrong and the Fed does ultimately have to do more.”

While most economists still say the Fed will cut by mid-year, the latest poll shows just 55% backing that scenario compared with over 70% last month.

The Reserve Bank of New Zealand, which often leads the interest rate cycle, was also forecast to wait until July-September 2024 before cutting.

The majority backing no cuts until the second half of 2024 has also grown stronger for the Reserve Bank of Australia, Bank Indonesia and the Reserve Bank of India. Even the Bank of Japan, the outlier sticking to ultra-loose policy through this entire round of inflation, is now expected to abandon negative interest rates next year.

Crucially, most economists agree the first easing steps will not be the beginning of a rapid series of cuts.

Asked what would prompt the first cut by the central bank they cover, over a two-thirds majority, 149 of 219, said it would be simply to make real interest rates less restrictive as inflation falls.

The remaining 70 said the first move would mark a shift towards stimulating the economy, suggesting only a minority expect a hard enough hit to demand and inflation to warrant a monetary response.

Global economic growth was forecast to slow to 2.6% next year from an expected 2.9% this year.

“Central banks have had the highest rates in order to fight inflation... it’s certainly restraining activity, and it’s going to be a while before we get global growth above what has been its historical average,” said Nathan Sheets, global chief economist at Citi.

Americans face inflation: An inflation gauge that is closely monitored by the Federal Reserve showed price increases remained elevated in September amid brisk consumer spending and strong economic growth.

Friday’s report from the Commerce Department showed that prices rose 0.4% from August to September, the same as the previous month. And compared with 12 months earlier, inflation was unchanged at 3.4%.

Taken as a whole, the figures the government issued Friday show a still-surprisingly resilient consumer, willing to spend briskly enough to power the economy even in the face of persistent inflation and high interest rates. Spread across the economy, the strength of that spending is itself helping to fuel inflation.