Fixed income
Has inflation peaked?
5 min read 15 Feb 23
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We expect inflation to remain a key issue for investors in 2023, although we are starting to see evidence that pressures are easing, especially in the US where headline inflation is now well off its recent peaks.
We think inflation will continue to slow in 2023, partly due to base effects and lower commodity prices, but also because financial conditions have tightened quite meaningfully over the past year. Monetary policy typically works with a 12-18 month lag, so we think the full impact of higher interest rates will only really start to be felt this year.
That said, we expect services inflation to remain elevated for some time, with the very tight US labour market excepted to put continued pressure on wages. Therefore, while the Fed should be able to slow their pace of hiking as headline inflation cools, they will probably want to keep policy in restrictive territory for a little while longer, and it is perhaps too soon to be talking about an outright Fed pivot at this stage.
Looking beyond 2023, we think the Fed may have a more difficult job keeping inflation below 2% than they have previously. This is because many of the forces that kept inflation so low for so many years could start to unwind. In particular, globalisation is likely to be a less powerful force going forward, reflected by issues such as the onshoring of supply chains and increased use of tariffs and other restrictive trade measures.
Inflation since 1970
Past performance is not a guide to future performance
Source: Bloomberg (US Urban consumers YoY index), 31 December 2022 (latest release). Information is subject to change and is not a guarantee of future results CPI Consumer Price Index
