Inflation outlook doesn’t justify market rate expectations

Our latest deep dive into the drivers of inflation reinforces our view that markets are overstating the risk of persistent price pressures and pricing in too many interest rate hikes. After rising in the near term, inflation should fall in 2027, including core rates from the middle of the year. Some indirect effects of higher energy prices are yet to feed through, but these shouldn’t prevent headline inflation falling next year as energy inflation turns to deflation, barring a much more adverse energy market outcome. And given that economies are not running hot, we do not anticipate reactive increases in wages and prices that would sustain higher core inflation. Risks are skewed to the upside, but even if higher near-term inflation causes rates to rise as far as markets expect, they are unlikely to stay elevated for as long as priced in.
 

Read the full report for free, to see exactly how far our inflation forecasts sit below market pricing and the consensus, with our end-2027 policy rate calls set against what investors expect. Find out when we think the ECB and Bank of England’s insurance hikes will start to be unwound, where we see oil and gas prices heading, and why rising food inflation in most advanced economies won’t stop headline rates from falling. We also show which advanced economies are running closest to capacity, why we think deflationary pressures in China will reassert themselves, and how El Niño threatens food prices in India and parts of South East Asia. All of this is backed by 33 charts and our key forecasts for inflation, growth and commodity prices, which you can download.