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Inflation decline: the ‘christmas miracle’ strengthening global economic outlook

Recent data indicates a significant decline in inflation globally, surpassing experts’ expectations. As reported by the Wall Street Journal, this phenomenon has been dubbed the “Christmas miracle.” While the effects will be spread over time, positive signs are evident in various countries.

Downward Path Defined, but with Varying Timelines

Goldman Sachs economists highlight that core inflation, excluding food and energy, recorded an annualized pace of 2.2% in the three months ending November in the United States, Europe, and emerging markets. They project that by 2024, the average inflation in these countries should reach or come close to the 2% set by major central banks.

Positive Impact on Economic Growth

Analysts believe that the decline in inflation can support economic growth in two crucial ways: by strengthening the purchasing power of families and allowing central banks to reduce interest rates. Michael Saunders of Oxford Economics predicts a 1.3% decrease in inflation in the eurozone in the next year’s fourth quarter.

Global and Regional Factors

While the United States and the United Kingdom face pressures related to labor market rigidity, the Eurozone seems to enjoy a faster decline in inflation. Common factors contributing to this decline include food products, energy, global goods prices, and monetary policy.

Reduction in Goods Prices and Supply Chain Normalization

2021 witnessed an increase in goods prices due to global disruptions in production and transportation, coupled with strong demand fueled by fiscal and monetary interventions. The Russian invasion in Ukraine further inflated commodity prices, reaching a peak of 10.6% in the Eurozone in October 2022.

Future Outlook and Impact on Labor Markets

According to experts, the slowdown in inflation, coupled with economic growth stagnation, paves the way for potential interest rate cuts next year. This perspective has already influenced bond prices and yields, benefiting US companies and homebuyers. However, European borrowers might have to wait longer, relying more on banks than capital markets.

Positive Conclusions Despite Challenges

Despite the challenges faced in 2021, including a surge in goods prices and instability caused by the pandemic, the decline in inflation offers positive economic prospects for 2024. With predictions of interest rate cuts and slower but stable growth, the global economic landscape seems to be on the path to normalization.

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