Inflation Eases, But What Does the Future Hold?
25th October 2024
In recent months, inflation has shown signs of stabilising across major economies. For expats, this is a crucial development, directly impacting everything from savings to investments. Let’s take a look at the latest inflation data and explore what the future may hold as central banks attempt to manage this delicate balance.
Latest Inflation Rates
As of October 2024, inflation rates across the US, UK, and Thailand reflect a broader trend of deceleration:
As of October 2024, inflation rates across the US, UK, and Thailand reflect a broader trend of deceleration:
- United States: The inflation rate in the US has eased to 2.4% for September, down from its peak of 9.1% in mid-2022. The Federal Reserve’s recent interest rate cuts aim to support economic growth while maintaining control over inflation.
- United Kingdom: In the UK, inflation has dropped to 1.7% in September, with the CPIH (which includes housing costs) at 2.6%. This marks a significant fall from the double-digit inflation seen in 2022.
- Thailand: Thailand's inflation rate rose slightly to 0.83% in July, but remains below the central bank’s target range of 1-3%, indicating subdued price pressures.
What Does Increased Global Liquidity Mean?
The easing of inflation has coincided with a rise in global liquidity, which refers to the availability of money or credit within the global financial system. As central banks, such as the US Federal Reserve, cut interest rates and increase the money supply (e.g., through quantitative easing), more liquidity is injected into the economy. This often supports risk assets such as equities, which are now approaching all-time highs.
However, with the M2 money supply (a key measure of liquid assets like cash and deposits) rising again after a brief decline, the risk of economic overheating remains. If too much money chases too few goods, inflation could resurface, forcing central banks to react with tighter monetary policies. This could impact global markets, including expat investment portfolios.
Boom and Bust: Can Central Banks Get it Right?
Historically, central banks have often overreacted, either tightening or loosening monetary policy too aggressively. This has led to the familiar boom and bust cycles, with inflation spikes followed by rapid interest rate hikes, and then rate cuts when economies begin to cool.
As inflation nears target ranges, central banks are trying to engineer a soft landing—stimulating growth without reigniting inflation. The challenge is whether they can achieve this without slipping back into another cycle of boom and bust. For expats with significant exposure to equity markets, this could lead to increased market volatility, even though the outlook remains cautiously optimistic.
The easing of inflation has coincided with a rise in global liquidity, which refers to the availability of money or credit within the global financial system. As central banks, such as the US Federal Reserve, cut interest rates and increase the money supply (e.g., through quantitative easing), more liquidity is injected into the economy. This often supports risk assets such as equities, which are now approaching all-time highs.
However, with the M2 money supply (a key measure of liquid assets like cash and deposits) rising again after a brief decline, the risk of economic overheating remains. If too much money chases too few goods, inflation could resurface, forcing central banks to react with tighter monetary policies. This could impact global markets, including expat investment portfolios.
Boom and Bust: Can Central Banks Get it Right?
Historically, central banks have often overreacted, either tightening or loosening monetary policy too aggressively. This has led to the familiar boom and bust cycles, with inflation spikes followed by rapid interest rate hikes, and then rate cuts when economies begin to cool.
As inflation nears target ranges, central banks are trying to engineer a soft landing—stimulating growth without reigniting inflation. The challenge is whether they can achieve this without slipping back into another cycle of boom and bust. For expats with significant exposure to equity markets, this could lead to increased market volatility, even though the outlook remains cautiously optimistic.
The Inflation Debate: Are the Figures Accurate?
One ongoing debate centres on how inflation is measured. Over the years, changes to the Consumer Price Index (CPI) calculation have resulted in lower official inflation figures compared to older methodologies. For example, under the 1990s method, inflation up to May 2023 would have been closer to 8%, and under the 1980s method, around 12%—significantly higher than the official figure of 4%.
These changes arise from adjustments to the "basket of goods" used to measure price changes. While these updates reflect modern consumption patterns, critics argue that they understate the real cost of living. Expats, particularly those in regions where currency fluctuations exacerbate price increases, may feel inflation more keenly than official statistics suggest.
What’s Next?
As further interest rate cuts and rising liquidity provide a boost to risk assets, expats should remain vigilant for signs of economic overheating. Staying diversified and conducting regular reviews of your financial plan will be key strategies to navigate these uncertain times.
One ongoing debate centres on how inflation is measured. Over the years, changes to the Consumer Price Index (CPI) calculation have resulted in lower official inflation figures compared to older methodologies. For example, under the 1990s method, inflation up to May 2023 would have been closer to 8%, and under the 1980s method, around 12%—significantly higher than the official figure of 4%.
These changes arise from adjustments to the "basket of goods" used to measure price changes. While these updates reflect modern consumption patterns, critics argue that they understate the real cost of living. Expats, particularly those in regions where currency fluctuations exacerbate price increases, may feel inflation more keenly than official statistics suggest.
What’s Next?
As further interest rate cuts and rising liquidity provide a boost to risk assets, expats should remain vigilant for signs of economic overheating. Staying diversified and conducting regular reviews of your financial plan will be key strategies to navigate these uncertain times.