The great inflation scare is fading

From Zurich to London to Washington, the great inflation scare that gripped the world economy after the pandemic is suddenly no longer keeping central bankers up at night.

Their confidence that raging consumer prices have been tamed is such that the US Federal Reserve just defied recent data to keep projecting three interest-rate cuts this year — and then the Swiss on Thursday went ahead and delivered one already.

With UK inflation slowing markedly, Bank of England hawks dropped their push for a hike, while on Wednesday, European Central Bank chief Christine Lagarde echoed her recent signal that a decision to ease in June remains on track.

The converging theme across rich-world economies at the end of the first quarter is that a once-in-a-generation cost-of-living shock is subsiding enough to soon shift towards easing mode.

While policymakers are cautioning that any moves will be gradual, investors — for now — are betting on at least three quarter-point reductions this year from the Fed, the ECB and the BoE, with odds favouring the first cut by June for all three.

While that is much less aggressive than what was anticipated in December, the market is at least zeroing in on a start date as it becomes increasingly convinced policymakers are on the cusp of reversing last year’s tightening campaign.

Beyond the Bank of Japan’s long-awaited exit from negative borrowing costs last Tuesday, the Fed’s decision the following day to hold firm on the prospect for rate cuts has offered financial markets reassurance that officials aren’t fazed by a recent pickup in inflation.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” Bank of England Governor Andrew Bailey said. “We need to be sure that inflation will fall back to our 2% target and stay there.”

In the euro region, the ECB has pencilled in a June cut ever since the start of the year, and Lagarde’s remarks suggested it remains on track to deliver that. She said in Frankfurt that officials need inflation-relevant data such as wages before they can move. “We will have a bit more by April and a lot more by June,” she said.

The overall progress that central bankers are acknowledging is becoming ever clearer in the global numbers. Inflation in the Group of Seven slowed to 2.9% in January, the lowest since April 2021, according to the OECD.