Russia’s invasion of Ukraine added further supply shocks to the economy, as the cost of supplying goods and services to the economy rose with higher energy prices, creating a second wave of inflation.
Miller says this supply-side inflation has diminished over the past year as economies have managed energy price shocks, and in his view this is the principal reason inflation has fallen over the past year.
Similarly to Moëc, he says the goldilocks situation in the global economy cannot persist.
His view is that while inflation has come down because of supply-side factors, “inflation in the services sector remains persistently high, which is usually a function of the jobs market.
"In order for inflation to come down to the central bank target rate of 2 per cent, it is hard to see how that can happen unless there is weakness in the jobs market. So while I think rates will be cut, they may not be cut as soon as the market expects, because central banks will be waiting for signs of services inflation coming down."
Steven Bell, chief economist – EMEA at Columbia Threadneedle Investments, notes rising unemployment typically means central banks cut rates in order to revive the job market, but that unemployment remaining low means “there isn’t the excuse to cut rates that the market has been looking for”.
Bell’s view is that the resilient job market means the short-term threat of a recession has been “eliminated” and with it the need for rates to be cut to anything like the extent anticipated by the market, though he does expect cuts to happen later in 2024.
Nicola Mai, sovereign credit analyst at Pimco, says many of the factors that contributed to the much higher inflation were temporary in nature, but many of those factors, particularly in the US where government spending has been high, were also the factors that contributed to the more positive growth outlook.
Mai’s view is that those factors receding is at the heart of inflation declining, but also of GDP declining, and this is the way in which the goldilocks scenario will end.
American dreams?
While the UK economy has probably defied expectations by (so far) avoiding recession, the region where the goldilocks scenario plays out most acutely is in the US.
Where UK and continental European economies have, in Miller’s words, been “stagnant”, the US economy has achieved consistent economic growth while inflation has fallen.
