QWhat’s the story with inflation?

Inflation has kept central banks on their toes, but aggressive rate hikes seem to have had some effect towards dampening growth in the Consumer Price Index, or CPI (which measures how much the cost of the things we typically buy changes). One of the key determinants on how the inflation story will play out is the labour market. The following charts show how overall inflation has declined, but looking at core inflation — which excludes volatile food and energy prices — high levels still persist.

Signs that headline CPI has peaked

Source: Bloomberg, TwentyFour Asset Management, May 2023

Core CPI is more persistent

The US boasts a robust labour market, but cracks are beginning to emerge as unemployment rates experienced a slight uptick in May. Meanwhile in the Eurozone, energy and food costs have fallen since the beginning of the year, but rapid wage growth is threatening to rekindle the inflationary flames before the recent European Central Bank (ECB) interest rate hikes have had sufficient time to put them out.

The United Kingdom faces additional challenges as labour shortages compound the effects of increasing wages. Central banks now anticipate a prolonged battle, pushing the timeline for achieving target inflation levels to late 2024 and beyond.