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The Cambridge Weekly – 17th July 2023

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17th July 2023

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Perspective News, The Cambridge Weekly

The Cambridge Weekly – 17th July 2023

Core inflation slowdown equals upbeat equity markets

We wrote last week that markets had come to expect another round of significant interest rate rises from central banks, and that risk assets such as equities were likely to come under some pressure. At the end of last week, however, equity markets rose sharply, with most more than reversing their losses of the previous week.

The driver of sentiment for both weeks has been estimates of how much central banks will have to move interest rates in the coming months. Those estimates are, in turn, driven by where inflation is and where it will get to over the next few months. Last week, investors were focused on how tight labour markets might keep underlying inflation pressures high, but the actual data published last week paints a rosier picture.

Greedflation or wage-price spiral?

It probably is not since the 1970s that inflation has been such a widespread topic in public discourse. This is because, of course, for decades – and particularly in the decade after 2008’s Global Financial Crisis (GFC) – there was very little of it. Academics and some investors discussed it in a hypothetical sense, speculating how globalisation or financialisation might have affected the inflation/unemployment relationship, but this usually felt like pure intellectual curiosity. Things could hardly be more different now. People are obviously worried about rising prices for goods and services, and what might happen to their individual or collective spending power. But beyond that, there is a deep political interest in what causes inflation.