As global economic growth slows, many central banks around the world have begun to cut interest rates in an effort to reignite economic expansion. One of the main reasons driving this move is that the year-on-year inflation rate in most countries has gradually declined from its post-pandemic peak to their targeted “2%” level.

In theory, moderating price growth should bolster consumer optimism, as it suggests that inflation’s erosion of wage gains is easing. Yet why do media reports still frequently highlight consumers struggling under the weight of high living costs?

The answer lies in the fact that the inflation rate measures year-over-year price changes. While current price growth may have slowed compared to the previous year, it does not change the fact that prices have significantly risen from the pre-pandemic levels.

(Source: BLS, EuroStat, Statistic Bureau of Japan, TrendForce)

Take the United States as an example. The latest CPI and core CPI year-on-year growth rates were 2.4% and 3.3%, respectively, marking their slowest pace in nearly three years. Meanwhile, the Federal Reserve’s preferred inflation gauge, core PCE, stood at 2.7%, down significantly from its peak of 5.6% in February 2022, reflecting a 2.9 percentage point decline.

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However, consumer perceptions often remain anchored to periods of lower prices, making it difficult to truly appreciate the recent moderation in price growth. From the perspective of consumers, prices for goods are still higher than they were a few years ago, even if the pace of increase has slowed.

According to average price data from the U.S. Bureau of Labor Statistics, most goods have seen price increases of around 20-40% over the past few years. Importantly, these elevated prices are unlikely to revert unless deflation occurs—something the Federal Reserve is unlikely to allow.

(Source: BLS)

Additionally, while wage growth has outpaced inflation since mid-2023, overall wage increases since the pandemic have remained below the cumulative rise in inflation. This has been a key factor in the decline in consumer confidence and the frustration with persistently high inflation in recent years.

(Source: BLS, Fred, TrendForce)

The Bank of Canada announced a 50 basis point rate cut to 3.75% on October 23, in line with market expectations, marking the largest rate reduction since the onset of the COVID-19 pandemic in March 2020.

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Bank of Canada Governor Tiff Macklem stated that price pressures are no longer broad-based, and the central bank’s focus is now on maintaining stability. While consumer and business investment spending has picked up, overall economic activity remains weak. Though this may help ease price pressures, with inflation now within the target range, the bank is keen to see stronger economic growth moving forward.

Tiff  Macklem further noted that if the economy performs as expected, the Bank of Canada will continue to lower rates to keep inflation on target and support demand. However, the timing and pace of future rate cuts will depend on incomming information, and adjustments will be made incrementally.

Looking ahead, the central bank forecasts that economic growth will gradually recover to around 2% by 2025, with further growth to approximately 2.5% in 2026. This is primarily driven by stronger consumer and business investment in a lower interest rate environment. The Bank of Canada also expects residential investment to rebound as housing demand increases, while exports should rise on the back of robust U.S. demand.

On inflation, the central bank anticipates some fluctuations in the coming months but expects it to remain within the target range as upward pressures on housing and service prices ease. However, if consumer and business spending grows more slowly than expected, inflation may still face some downside risks.

(Source: Bank of Canada, TrendForce)

The Reserve Bank of Australia (RBA) announced on September 24 that the cash rate target remain at 4.35%, marking the seventh consecutive month at this level, which is also the highest in nearly 12 years.

In the meeting statement, the RBA noted that restrictive financial conditions continue to suppress consumption, contributing to a slowdown in the economy. However, the unemployment rate remains stable, the labor force participation rate is at a historic high, and job vacancies continue to grow, slightly easing labor market tensions.

The RBA stated that while household consumption is expected to recover in the second half of the year, if the pace is slower than anticipated, it could lead to prolonged weakness in economic output and further softening of the labor market. Moreover, global economic instability and geopolitical risks add to the uncertainty surrounding Australia’s economic outlook.

The RBA also highlighted that recent data reinforces the potential for upside inflation risks. The central bank now expects inflation to return to the target range by the end of 2025 (compared to the previous estimate of mid-2025 in August) and to approach the midpoint of the target range by 2026.

The RBA emphasized that bringing inflation down remains its top priority and stated that it would maintain restrictive monetary policy until there is clear evidence that inflation is steadily returning to the target range. Following this statement, the market now expects the RBA to hold off on cutting rates until February next year.

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The U.S. inflation continued to ease in August, as reported by the Bureau of Labor Statistics on September 11. The Consumer Price Index (CPI) increased by 2.5% year-on-year (previously 2.9%), with a monthly increase of 0.2% (unchanged from 0.2% in July). The core CPI, which excludes food and energy, remained steady with an annual increase of 3.2% (same as the previous 3.2%), and a monthly increase of 0.3% (up from 0.2%).

Breaking down the data, the decline in the annual CPI growth rate was largely driven by a reduction in energy prices, benefiting from last year’s high base effect. Energy prices fell 4% year-on-year (previously up 1.1%). However, core CPI, excluding food and energy, remained unchanged, primarily due to a rebound in housing services prices. The annual growth rate of housing services prices increased to 5.2% in August (up from 5.1%), with a monthly increase of 0.5% (up from 0.4%).

Housing prices have consistently been the largest impediment to the decline in core CPI. However, due to the recent slower pace of reduction, the market now anticipates an 85% probability of a 25-basis-point rate cut in September (up from 66% prior to the release of the CPI data). Moreover, the market expects a total of four rate cuts throughout 2024, with one in September, two in November, and one in December.

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The Federal Reserve released the minutes of the July FOMC meeting on August 21, providing insight into the views of Fed officials on the current economic conditions and outlook:

Inflation: Inflation has eased compared to a year ago, with core PCE rising 2.6% year-over-year in June. Although still above the Fed’s 2% target, recent data have given Fed officials confidence that inflation is on track to reach the target, supported by factors such as slowing economic growth, weakened pricing power among businesses, and reduced household savings. Many officials noted that as the labor market rebalances, wage growth has continued to slow, which should further translate into a decline in core non-housing services inflation. Some officials also noted that the decline in new tenant rents is likely to have a delayed impact on housing services inflation, leading to the continuous moderation of housing services inflation

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Employment: The labor market is currently strong but not overheating. While the unemployment rate has been rising slightly since April, it remains at historically low levels. Some officials believe that job growth may be overestimated, as several officials pointed out that various indicators suggest the labor market is continuing to slow, with declines in hiring rates and job openings. Others also indicated that the rebalancing of the labor market has been partly supported by an increase in labor supply, particularly due to rising labor force participation rates among those aged 25 to 54 and an increase in immigration.

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Policy Outlook: With inflation continuing to decline, most officials believe that if inflation continues to fall as expected, it would be reasonable to consider easing monetary policy at the next meeting. Many officials see increasing risks to the employment target, warning that if the labor market slows further, it could lead to more significant deterioration. All officials agreed on the necessity of rebalancing and closely monitoring the risks associated with the dual mandate of price stability and maximum employment.

Overall, with inflation steadily decreasing and potential risks of labor market deterioration, the Fed has signaled a leaning toward a rate cut in September. Additionally, the U.S. Bureau of Labor Statistics on August 21 revised down the nonfarm payrolls by 818,000 from April 2023 to March 2024, meaning that the average monthly nonfarm payroll increase for this period will be revised down from 242,000 to 174,000, confirming the possibility that employment growth had been overstated. The market currently expects a total of 100 basis points in rate cuts throughout 2024 (25 basis points in September, 50 basis points in November, and 25 basis points in December).

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(Photo Credit: Federal Reserve)