A bet on rates coming down might be premature, says Mazars’ George Lagarias

by | Nov 20, 2023

UK and US flags

George Lagarias, Chief Economist at Mazars, comments on the outlook for UK and US inflation, and explains why a bet on rates coming down may be premature.

“Last week, inflation readings in both the US and the UK were encouraging. For September prices didn’t move at all, so the year-on-year headline number dropped to 3.2% and 4.7% respectively. Consumption in both countries is weakening, and data in the UK was especially poor, suggesting that high-interest rates are finally deterring consumers from paying higher prices. Yields dropped significantly last week, and stocks resumed their rally towards all-time highs, as markets are now pricing in rate cuts early to mid-next year.

“With the conflict in the Middle East contained within the region and no oil embargoes in sight, the question in everyone’s mind is whether this second wave of inflation is finally pushed back. Are we inching towards normality? Our opinion is not too dissimilar from that of the central banks. “Wait for it”. For one, we are now entering the festive season, where discretionary spending finally picks up.

“Consumers have learned to wait for sales on Black Friday. Following that, there’s traditional Christmas spending. We should wait for December’s data for a more accurate picture. Second, in terms of non-discretionary spending, energy prices might be coming off, but tensions are still high. The recent energy and food conflagrations as a result of war weren’t accidents. They were engineered. It stands to reason that leaders who want to see further political upsets won’t necessarily stop here.

“Third, there’s no real estate crash. While this is good for those who own the asset, it’s bad for those who need it and have to pay for it as it keeps rents very high. City-based workers are still forced to demand higher salaries at year-end, which employers might have to pay. Fourth, labour markets remain rather tight across the board. This means that getting back to a sustainable 2% inflation path will not be easy. Many Fed members have expressed the opinion that they might have yet to do more inflation fighting, and it would be unwise not to take them at their word.

“Long-term factors are not very positive for inflation returning to a sustainable 2% either.”

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