Up, down and all around: what’s happening with inflation?

Aurèle Storno, CFA - CIO, Multi Asset
Aurèle Storno, CFA
CIO, Multi Asset
Florian Ielpo, PhD - Head of Macro, Multi Asset
Florian Ielpo, PhD
Head of Macro, Multi Asset

key takeaways.

  • Our inflation signals indicate a new inflation regime characterised by ‘high but declining’ inflation pressures
  • This regime is visible globally, but is most prominent in economies such as the US, the UK, and Japan. US inflation pressure currently relates to the job market and energy costs – two elements that could be future sources of inflation
  • Caution should prevail; the inflation story might not be over just yet.

Inflation has dominated headlines for the last three years, up until the Federal Reserve's pivotal shift in December 2023. Following this pivot, public interest has waned as attention shifted towards the possibility of a soft landing and speculation about when central banks might begin to cut rates. However, more recently, there have been signs that inflation pressures are starting to resurface.

This raises an important issue: is the trend sustainable? The question becomes particularly relevant given the recent volatility observed in the bond markets. At present, our indicators suggest that this might not be a lasting trend, and it could be crucial to heed the message of the underlying data. So what is this message telling us right now and can a close examination of inflation pressures explain the expected downtrend?

Read also: Will US market concentration fade in 2025?

Where is inflation heading?

To gain a precise understanding of prospective economic trajectories, it is crucial to reflect on historical economic data. Figure 1 depicts the comparative evolution of our World Inflation Indicator, which now consolidates 752 time series daily. This comprehensive gauge considers a variety of potential inflationary sources including economic activity, supply shocks, cost changes and global inflation pressures. Our nowcasting indicator quantifies the current magnitude of these inflation pressures, while the associated diffusion index prognosticates their probable future direction – ascendant or descendant. These indicators distinctly illustrate the daily variations of this global inflation gauge over the preceding three years (as shown in Figure 1).

The narrative derived from this analysis is unequivocal: Over the period, escalating inflation pressures have been successfully mitigated by concerted global monetary policies, initiating the disinflationary phase we have observed. The disinflationary process reached its lowest ebb in August 2023 and inflation pressures have since commenced a resurgence.

In the past six weeks, we have observed a new development: The diffusion index has receded below 50%. This indicates that the forthcoming phase for our indicator is likely to be a downturn rather than an upturn – suggesting that a second disinflationary wave may be approaching. This prompts us to investigate the origins of this signal.

FIG 1. Phase diagram of our World Inflation Nowcaster1

comparison

Leaders of disinflation

The decline in the diffusion index is not uniform across regions. Figure 2 presents the diffusion index's most recent readings along with its recent trends. A hierarchy of the current diffusion index values from highest to lowest provides a lucid perspective on this disparity: Continental Europe continues to see an uptrend in inflation-related data, whereas in the English-speaking world, notably the US, data indicates a downturn, with less than 40% of inflation-related data trending upwards in the US. This divergence sends a significant signal concerning future monetary policy: recent inflation figures, which were slightly lower than anticipated, should be considered in the context of these trends.

So, is inflation completely off the table? Clearly not, particularly in the US. Analysis of the key factors behind the decline in the US diffusion index identifies two subcomponents that do not yet point to disinflation: job market pressures and energy costs. Presently, these factors are critical, as they introduce two uncertainties that could influence the trajectory of inflation: the potential impact of upcoming migrant policies on the job market under the Trump administration and the recent surge in oil prices. The latter may reflect the ongoing recovery in the European economy, similar to the situation observed in 2009. These elements could potentially drive inflation higher in the long term due to job market pressures and, in the short term, through rising energy costs.

Currently, this scenario is more of a risk than a certainty, as the primary data trends still indicate a phase of disinflation. Nevertheless, the persistence of these uncertainties could mean volatility in the bond market persists, as investors remain vigilant about future economic shifts.

FIG 2. Diffusion index (percentage of rising data) across country-level inflation nowcasters2

impact

What this means for All Roads

Our current asset allocation displays a balanced distribution between cyclical and defensive assets, maintaining an exposure that closely aligns with long-term market averages. Duration has been an unstable allocation recently but trends in global bond markets are beginning to show preliminary indications of reaching a bottom, and volatility is improving but remains somewhat high. At this juncture, improvement in our signals is a requisite for an overweight allocation to bonds. Notably, our macro allocation signals have shifted towards a more constructive stance recently, primarily driven by our inflation nowcaster.

Simply put, the recent inflation tremors could be short-lived, unless Trump administration policies add to them.

 

Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises is designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

  • Growth data continues to point to a recovery, in the US, China and in Europe
  • We are currently detecting a change in the inflation regime
  • Our monetary policy signals remain in the dovish camp 

World growth nowcaster: long-term (left) and recent evolution (right)
 

growth


World inflation nowcaster: long-term (left) and recent evolution (right)

Inflation

 
World monetary policy nowcaster: long-term (left) and recent evolution (right)


Monetary policy
  

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy). 

2 sources
view sources.
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1 Source: Bloomberg, LOIM. As of 22 January 2025. For illustrative purposes only. Blue dot signals January 2022 and red dot is for January 2025.
2 Source: Bloomberg, LOIM. As of 22 January 2025. For illustrative purposes only.

important information.

For professional investors use only

This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.

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