Probing the “Last Mile”

The “macroeconomic fate” of 2024 will depend on whether the disinflation process which started last year can continue swiftly, allowing central banks to remove some of their restriction. Disinflation in 2023 was primarily driven by exogenous factors – the normalisation of supply lines and energy prices - and unfortunately, we are seeing the return of “polycrisis” risks which could derail the general slowdown in the price of tradables in the global economy. The recent developments in the Red Sea suggest that the inflationary impact of the Middle Eastern crisis could take a different form than the “usual’ oil price shock, as supply lines are starting to be disrupted again. The election in Taiwan of a DPP President for the third time in a row forces us to confront again the possibility of another escalation of the Sino-American rivalry, with the potential to trigger another trade war.

Yet, we still see reasons to remain reasonably confident. The Red Sea disruption cannot be compared with the general seizure of supply lines when economies reopened after Covid. The fact that the Taiwanese President-elect did not secure a parliamentary majority, in a configuration in which China is not in the best position to take the risk to lose support from foreign demand, could help avoid tension between Beijing and Washington escalating too far.

Still, even if the exogenous inflationary forces are kept under control, the latest consumer prices print in the US suggests that the “last mile” of disinflation remains bumpy. On a 3-month annualised basis core inflation has been hitting a “resistance line” above 3% since September. The materialisation of the Bernanke-Blanchard sequence, where labour cost-driven inflation takes the lead while supply-driven shocks fade, cannot be ruled out yet. We are less worried about the Euro area, despite the continued decline in productivity there which pushes unit labour costs up, as we expect the deterioration in economic confidence to take margins down.