In the latest report, two analysts from Goldman Sachs, Rikin Shah and Cosimo Codacci-Pisanelli, combined inflation data to analyze the policy paths of major central banks in Europe and the United States. In summary, the two analysts believe that based on the current global inflation trend, it is time for central banks to start easing.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d290ed94-eff5-451d-84ee-e6fd15eda541.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d290ed94-eff5-451d-84ee-e6fd15eda541.png"/>
However, currently, only the Federal Reserve is willing to loosen financial conditions. In fact, after an unprecedentedly loose policy in the fourth quarter, the financial conditions in the United States, the European Union, and the United Kingdom are still slightly tightening in 2024...
Why is this happening?<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/411619b6-b888-41ee-9294-bfbc152764c9.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/411619b6-b888-41ee-9294-bfbc152764c9.png"/>
<blockquote>
<h2>TL;DR:</h2>
<ul>
<li>United States: Although the recent Consumer Price Index (CPI) is slightly higher than expected, it does not change the view that the Federal Reserve can relax its policy in March.</li>
<li>Europe: The slowdown in inflation in the European Central Bank is faster than expected, and the ECB will eventually have to face a sharp slowdown in inflation.</li>
<li>United Kingdom: The market underestimates the possibility of the Bank of England quickly transitioning from a tightening policy to an easing policy.</li>
</ul>
</blockquote>
<h2>Federal Reserve: Mixed inflation data, but signs of easing are evident</h2>
The latest data shows that the year-on-year CPI in the United States in December was 3.4%, with an expectation of 3.2% and a previous value of 3.1%; the year-on-year core CPI in December was 3.9%, with an expectation of 3.8%.
Although this week's Consumer Price Index (CPI) is slightly higher than expected, which has dampened some investors' confidence in the Federal Reserve's imminent interest rate cut, analysts believe that the current progress in inflation is sufficient for the Federal Reserve to ease its policy in March.
The reason is that although the monthly inflation data has fluctuated greatly recently, especially entering January, the data may be more noisy due to the impact of the beginning-of-year effect. However, the six-month average of core PCE inflation is close to 2%, and Federal Reserve Chairman Powell has shown a preference for easing policy before inflation reaches 2%. Financial blog Zerohedge commented:
<blockquote>
This makes sense - you wouldn't want to wait until inflation reaches the target before starting an easing cycle, as it would be too late by then.
</blockquote>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/530fa832-5292-4da5-b894-d962fa235dd9.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/530fa832-5292-4da5-b894-d962fa235dd9.png"/>
The analysis states that the current policy is restrictive by about 200 basis points, which is considered too strict given the current progress in inflation data. Therefore, it is now possible to discuss the magnitude and speed of interest rate cuts, although this ultimately depends on how the economic growth prospects evolve. However, the Federal Reserve clearly has sufficient reasons to start a new cycle.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/529cf9c2-6f01-4215-9ef8-dc82e219b1fd.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="European Central Bank" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/529cf9c2-6f01-4215-9ef8-dc82e219b1fd.png"/>
<h2>Europe: Inflation Slows Faster Than Expected by ECB</h2>
Compared to the inflation forecast data in September 2023, the European Central Bank (ECB) has significantly lowered its forecast in December, but it is still about 20 basis points higher than the actual core inflation in December.
Analysts say that this is &#34;quite important&#34; for analyzing the ECB:
<blockquote>
Recent discussions by the ECB (such as Schnabel's comments) seem to be slightly behind, and they will eventually have to face the reality of sharp inflation decline.
</blockquote>
Against this backdrop, the media predicts that headline inflation in the second quarter of this year will fall below 2%, and core inflation will also fall below 2% in the third quarter.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3a92774f-3eb2-4455-9ab0-6083d186a3ba.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Goldman Sachs' inflation forecast vs ECB's December inflation forecast" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3a92774f-3eb2-4455-9ab0-6083d186a3ba.png"/>
ECB Governing Council member Vujcic released some dovish comments over the weekend, mentioning that although he is more inclined to cut interest rates by 25 basis points, the possibility of a 50 basis point cut cannot be ruled out.
In addition, ECB President Lagarde mentioned that once it is certain that inflation will reach 2%, the ECB will start cutting interest rates. Unless unexpected, the inflation data for January and February should allow the ECB to have a clear understanding of the continued slowdown in European inflation before the March meeting.
Furthermore, despite the ECB spokesperson repeatedly mentioning the stickiness of wages, wage changes are slow and lagging indicators. Therefore, analysts believe that if core inflation cools down rapidly, wage agreement data (mainly released in the second quarter of this year) should not be used as the starting point of the cycle, but as data to determine the path and end point of the cycle.
<h2>UK: Inflation Progress Provides a Turning Point for the Bank of England</h2>
Analysts say that the market underestimates the possibility of a faster turnaround by the Bank of England (BoE), especially the possibility of interest rate cuts in March and the second/third quarter of this year. Analysts expect that the BoE may cut interest rates by 25 basis points in May.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b8adfc88-ce07-463f-93da-4997242bd01e.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Bank of England" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b8adfc88-ce07-463f-93da-4997242bd01e.png"/>
Analysts say that although inflation progress in the UK lags behind Europe, it is also slowing down rapidly:
<blockquote>
Overall inflation in the second quarter may fall to 1.5%. This is mainly influenced by energy prices, while service sector inflation may still be higher than 5%, it is still far below the Bank of England's forecast.
</blockquote>
Furthermore, analysts say that &#34;the most important thing is that policy interest rates have become too tight relative to the inflation situation&#34;:
<blockquote>
Inflation has been gradually slowing down, and the Bank of England should start cutting interest rates as soon as possible and monitor the fiscal situation and economic growth profile this year to determine the final level of interest rates.
Next week's release of labor market and inflation data will be crucial in predicting the pace of interest rate cuts by the Bank of England. In terms of wages, the previous labor market report showed very weak wage growth in the private sector, with monthly annualized wage growth at -2.8%.
</blockquote>
However, the clear trend over the past few months suggests that the annualized data for the third quarter is expected to further decline from last month's value, which is good news for the Bank of England.
In summary, global inflation has significantly slowed down, and the annualized MoM level is now close to or at the target level.
In this context, the current policy interest rates appear to be too tight, and it is time for central banks around the world to start easing their policies.
The Federal Reserve has already shown a tendency to ease, but the European Central Bank and the Bank of England have not yet made a shift. However, analysts expect them to do so soon.

Global inflation has significantly slowed down, with the year-on-year growth rate approaching or reaching the target level.

After analyzing the inflation data in Europe and the United States, Goldman Sachs concluded that central banks should start easing monetary policy.