Dealing with the inflation hangover | Beyond the Headlines

I think the key issue, as this chart shows, is that we still expect the level of GDP to converge on that old forecast. And that’s largely because certainly in the case of the US and in China, that was about bringing forward demand rather than just being a brighter outlook per se. But nevertheless, you know, good news over the last year on a global level.

But one thing that didn’t really surprise us last year was the fact that inflation came down pretty much as expected. You look at the second half of the year with the economy holding up a little bit better, some volatility in commodity prices. There was a little bit of stubbornness and inflation. But I think the big picture is that we’re pretty much seeing the disinflationary story evolve as we’d set out about 15 months ago.

In fact, if anything, our forecast for inflation at the end of this year, only about half a percentage point higher than they were 15 months ago, which given the cumulative price rise over that period, I would say is actually a pretty small difference. And the good news in a sense, doesn’t stop there because if you look at surveys, they certainly point to a loss of momentum in the global economy, but they also point to the fact that that loss of momentum is probably stabilized and stopped.

So on the services side of the economy, survey certainly point to a full back in activity, but growth in that activity is pretty much stabilized in the last three, three, four months or so on the services side of the economy. Industrial clearly struggling, but certainly not getting any worse. So, you know, so far so good. This is a pretty optimistic outlook, certainly not as dire as perhaps economists and markets have been expecting over the course last 15 months.

And certainly there were reasons to be optimistic as well about the year ahead. Since October, when we’ve seen the peak in long term bond yields, actually bond yields have fallen back quite substantially, 100 basis points in the ten year Treasury, 70 basis points in the UK, gilt at the ten year maturity and in Germany around 60 basis points as well. So a big fall back in discount rates which has helped to really see a rally in risky assets and that should help the economy via wealth impacts.