Markets seem to be embracing the latter explanation, anticipating that the US Federal Reserve and the European Central Bank will start cutting interest rates in the spring. This sentiment is not unfounded: If we consider the six-month annual percentage change in core inflation — a timelier indicator of underlying inflation than the 12-month change — the US and the eurozone have brought inflation back to their 2% target. The evidence points to a persistent decline, regardless of the recent (small) increase in headline figures.
After reaching its highest level in decades in mid-2022, inflation in the US and the eurozone fell sharply over the second half of last year. But, in December, the headline consumer price index (CPI) in the US and the Harmonized Index of Consumer Prices (HICP) in the eurozone rose slightly. Was it an aftershock or a foreshock?
Central banks, taken aback by last year’s rapid disinflation, now face the question: Are their calls for caution driven by a belief in persistent inflationary pressures, possibly explaining recent increases, or are they simply admitting uncertainty?
