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Disinflation trends in 2023: A global overview with focus on China's deflation

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2023-12-21

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As 2023 comes to a close, disinflation appears to be the rule, but not in China, where deflation persists, defying expectations as cost pressures continue to surprise.

The contrast with the beginning of the year is striking. For instance, consider US consumer prices, which surged at an annual rate of 6.5% in January and 6.4% in February, only to fall to 3.1% in November.

In the European Union, the improvement is even more dramatic, with annual inflation dropping from 9.2% in January to 2.4% in November. Meanwhile, the UK witnessed a decline from a 10.5% rate in January to 3.6% in November.

This news has been welcomed by investors worldwide, especially the Federal Reserve (Fed), which is the sole central bank contemplating rate cuts in 2024.

The UK's annual inflation rate reached a two-year low of 3.6% in November, down from 4.5% the previous month, with forecasts suggesting a minor dip to an annual 4.4%. Surprisingly, inflation actually decreased by 0.2% in November, instead of the expected 0.1% increase.

The easing in inflation has been observed in the Eurozone (2.4%) and the EU (3.6%), while US inflation barely moved in November, dipping from 3.2% in October to 3.1%. Australian inflation also eased to 4.9% in October from 5.6% in September.

Despite robust labor markets in most major economies, such as Australia, the US, New Zealand, and parts of the EU, disinflation is gaining momentum as 2023 draws to a close.

This trend could be attributed to the rapid interest rate hikes by central banks over the past 18 to 24 months alone or a sign that policy adjustments are catching up to economic activity, likely to continue into 2024, potentially hampering growth.

Official statistics from Eurostat reveal that annual inflation in the Euro area fell to 2.4% in November, down from 2.9% in October, approaching the European Central Bank's 2% target after more than two years. This marks a significant reduction from November 2022 when the inflation rate stood at 10.1%.

In the entire European Union, inflation also declined notably compared to a year ago, dropping to 3.1% last month from 3.6% in October, and significantly lower than the 11.1% recorded a year ago.

The core UK Consumer Price Index (CPI), which excludes volatile items like food, energy, alcohol, and tobacco prices, reached an annual rate of 5.1%, well below the forecasted 5.6%.

The Bank of England has consistently resisted market expectations for substantial interest rate cuts in 2024, emphasizing the persistence of key indicators of UK inflation.

While the US and Australia have avoided negative GDP growth over the past two years, the UK's growth has fluctuated, dipping into negative territory before recovering. The UK is now forecasted to achieve 0.5% growth, a shift from earlier predictions of a 1% contraction, and 0.7% growth in the following year, down from the previously anticipated 0.8%.

Richard Carter, head of fixed interest research at private wealth managers Quilter Cheviot, noted that the latest inflation figures provide a sense of cautious optimism in the UK, considering the cost of living crisis and bond market turmoil of the previous year. However, he acknowledged that the broader UK economic picture remains complex, marked by stagnation and subdued growth prospects.

In the Eurozone and the EU, energy costs and prices, especially gas, have stabilized compared to a year ago, but concerns about inflation and lackluster growth persist, even as inflation rates decline.

Germany remains a significant concern for the EU, with a projected contraction of 0.3% in 2023 and minimal growth expected in 2024. France, another major economic engine in the EU, is forecasted to achieve approximately 1% growth this year, rising to 1.4% next year.

In the US, the market anticipates three rate cuts in 2024, starting around March, while Europe has two cuts on the calendar. However, these are market expectations and not certainties. If there are no developments by the second quarter of next year, investors may react strongly, reminiscent of the taper tantrum in 2013.

National Australia Bank economists have revised their global economic growth projection for 2023 to 3.1% (up from 3.0%), with a slowdown forecasted for the following year at 2.7%, instead of the previous 2.6%. While this reflects a modest recovery, it remains below the long-term average of 3.4%.

Inflation remains a key uncertainty in this outlook, influencing the timing and extent of future monetary policy adjustments. Additionally, geopolitical factors, including conflicts in Russia-Ukraine and the Middle East, tensions between the US and China, and uncertainties surrounding the 2024 US Presidential Election, could continue to impact economic activity.

In contrast, China has seen its official rates, particularly those related to interest rates, reach all-time lows following two cuts earlier in the year. Deflation driven by falling pork prices and declining produce prices suggests that high inflation will not be a concern for China in 2024.

As for Australia, the situation will become clearer after the Reserve Bank of Australia (RBA) meets in early February, armed with data on the December quarter CPI, the December inflation monitor, retail sales figures, two months of property prices, and December's job data.

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