Slow but sure progress on inflation
Notes: The figure shows year-over-year changes in the core consumer price index (CPI) for all locations except Australia, where it shows trimmed mean CPI. Year-end 2023 figures are Vanguard forecasts.
Sources: Vanguard calculations, using data from the U.S. Bureau of Labor Statistics, Statistics Canada, Eurostat, the U.K. Office for National Statistics, and the Australian Bureau of Statistics accessed through Macrobond on June 15, 2023.
The last mile to target inflation may take some time
There’s progress in the fight against inflation, but it’s too early to declare victory. Vanguard foresees developed-market core inflation continuing to fall through the end of 2023 from recent generational highs. But we expect it will be late 2024 or even 2025 before it falls back to central banks’ targets of mostly around 2%.
“We believe central banks have more work to do,” said Andrew Patterson, Vanguard senior international economist. “We’ve always said inflation wouldn’t come down magically, even as post-pandemic supply chain issues were resolved. The pandemic accelerated demographics-driven changes to labor markets. Strong demand for workers who can command higher pay than historical standards requires monetary policy that is clearly restrictive. The last leg of inflation reduction to central bank targets may be the most challenging.”
That last leg is also likely to vary by region, said, a Vanguard economist. “The initial catalysts for the surge in inflation were global in nature,” Thomas said. “The pace at which inflation travels that last mile to target will depend more heavily on local drivers: how restrictive policy tightening is in each country or region and local demand, labor market, and housing dynamics.”
Thomas noted that Australia, Canada, and now the United States have paused in what had been a relentless cycle of rate hikes. Hikes have since resumed in Australia and Canada, and the Federal Reserve has hinted that’s likely to be the case in the United States as well.
A closer look