US is on course for ‘immaculate disinflation’; UK and Europe to follow suit. High employment and the absence of significant economic contraction has removed pressure on central banks to cut interest rates as headline inflation falls.
Instead, they can wait for wage inflation to fall to the 3-4% level consistent with their long-term 2% inflation targets.
We think that US wage inflation is already at these levels so, when the figures come through, the Federal Reserve (Fed) will be first to cut.
The European Central Bank (ECB) should also see better news on wages ahead of their June meeting.
The Bank of England is set to lag, as wage inflation remains high even as headline consumer inflation falls sharply.
However, delays of a few months to the start of interest rate cuts may not matter much to markets and consumers if long-term interest rates come down in anticipation of an extended cycle of interest rate cuts.
We therefore continue to forecast a pickup in economic growth. While bond valuations are attractive, the combination of rate cuts and economic growth will also support gains in the equity market.
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Columbia Threadneedle Investments
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