There has been growing evidence that pipeline price pressures have eased, underlining our view that inflation will fall sharply next year. Commodity prices and shipping costs have fallen, product shortages have alleviated, labour markets seem to have reached ‘peak tightness’, and expected inflation has edged down. But core inflation is likely to take longer to fall in Europe than in the US, partly because Europe will continue to suffer from a bigger energy supply shock. In addition, labour supply shortfalls and fiscal largesse should sustain non-energy price pressures in the UK, and some lingering supply problems and greater price and wage rigidity risk locking in inflation for longer in the euro-zone. So, while we expect the Fed to cut rates in the second half of 2023, we doubt that the BoE and ECB will be able to do so before 2024.
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