Charging the Global Economy: Inflation Cools in US and UK

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(Bloomberg) — Inflation measures eased in the US and UK last month, boosting bond prices after a deep sell-off and firming bets on interest rate cuts.

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In the US, the core consumer price index – which excludes food and energy costs – fell for the first time in six months, hampered by cheaper hotel stays, small improvements in medical care services and modest rent increases. Inflation in the UK unexpectedly cooled for the first time in three months due to softer travel costs.

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Meanwhile, China’s economy – unadjusted for inflation – reached its second slowest pace since it began transitioning to a market economy in the late 1970s. Although real growth reached 5%, the economy grew by only 4.2% when adjusted for inflation.

Here are some charts from Bloomberg this week on the latest developments in the global economy, markets and world politics:

US

Consumer prices rose in December below forecast, a welcome drop that helped stem a deep selloff in bond markets and renewed bets that the Federal Reserve will cut interest rates sooner than previously thought.

When Fed officials gather in two weeks they are likely to think in a way that confuses the markets: Since September, as they cut short-term interest rates by a full percentage point, long-term government bond yields have been moved by an almost equal amount – but. on the other hand. For some on Wall Street, the discrepancy is evidence that the US central bank has misread the economy and gone too far with rate cuts.

America’s wealthiest are among the biggest winners since President Joe Biden took office, despite his farewell speech warning of “oligarchy” and “tech-industrial complexes” threatening US democracy.

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In Europe

Inflation in the UK unexpectedly cooled for the first time in three months in December, prompting traders to increase bets on a Bank of England interest rate cut this year.

Germany’s economy is set to shrink for the second time in 2024 and is unlikely to grow significantly in 2025, posing a challenge to the country’s new government when snap elections are held in February. Gross domestic product fell 0.2% after falling 0.3% in 2023.

UK retail sales posted a surprise drop in the crucial Christmas period last month, knocking back the Labor government’s hopes of reviving economic growth. Despite growth in real incomes, households are in a cautious mood amid warnings of a resurgence in inflation and expectations of a slow decline in borrowing costs.

In Asia

President Xi Jinping’s government hit last year’s target of 5% growth, a telegraphed victory that was hardly surprising. A summary from the National Bureau of Statistics showed China’s two-track economy continued to be boosted by trade while consumer spending remained muted. However, nominal GDP growth – unadjusted for price changes – slowed to 4.2% in 2024, the second weakest pace since China began transitioning to a market economy in the late 1970s.

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China’s trade surplus rose to a record last year, driven by strong exports that have boosted the economy but could soon be threatened by the incoming Trump administration. Strong demand from overseas has helped boost a domestic economy that has been weighed down by a years-long housing crisis. Exports account for nearly a quarter of economic growth in 2024.

Emerging Markets

Israel and Hamas have agreed to free dozens of hostages and end the war in Gaza that has killed tens of thousands of people in the past 15 months and caused chaos in the Middle East. The ceasefire will begin on Sunday – the day before Donald Trump succeeds Joe Biden as US president – and six weeks ago, Qatari and US officials, who were mediating between the warring parties, said the officials.

Israel raised a record amount of debt last year to fund its war against Hamas and other Iran-backed militias. The government borrowed 278.4 billion shekels ($75.9 billion), surpassing the country’s previous record of 265 billion shekels in 2020 during the Covid crisis. Most of the borrowing – about 81% – is done on the local Israeli bond market.

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The world

The International Monetary Fund has upgraded its global growth forecast for this year, fueled by stronger-than-expected US demand and lower global inflation that will allow central banks to continue cutting interest rates.

Indonesia unexpectedly cut interest rates, while Romania kept borrowing costs unchanged. The Bank of Korea has held rates steady as it monitors currency and political unrest, while Poland and Kazakhstan are on hold.

China’s quest for self-sufficiency has extended to the macadamia nut fields of Kenya and the cattle ranches of Bolivia, as part of a campaign in recent years to diversify food sources away from traditional Western suppliers. The loss of market share for countries allied with the US is a gain for countries from the Global South, which Beijing wants to court as geopolitics increasingly unites the world into different blocs.

—With help from Philip Aldrick, Irina Anghel, Galit Altstein, Hallie Gu, Annmarie Hoordern, Kamil Kowalcze, John Liu, Yujing Liu, Fiona MacDonald, Eric Martin, James Mayger, Sergio Mendoza, Helen Nyambura, Amara Omeokwe, Jana Randow, Tom Rees, Zoe Schneeweiss, Mark Schroers, Ben Steverman, Alex Tanzi, Dan Williams and Nguyen Xuan Quynh.

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