Inflation Takes a Breather, But Don’t Get Too Comfortable

Samar Casaneanu
August 2, 2024
2:20 pm

When I say inflation takes a breather, I mean it’s not increasing as rapidly—not that it’s decreasing. Surely, you didn’t think inflation was actually going down, did you?

Unsurprisingly, the conversations around inflation and the global economy have followed the trajectory predicted by economists. Inflation has lingered like a stubborn piece of chewy nougat caramel, much longer than anyone would have liked. Back in December 2023, market analysts predicted six rate cuts in the US this year, yet we haven’t seen one. Europe has maintained interest rates at 3.75%, while the UK has held steady at around 5.25%.

Initially, the Eurozone seemed poised for rate cuts after positive figures in unemployment and GDP growth in the private sector. Europe did its first cut in June, making it the first major economic region to do so.

Stagnant service pricing in Europe for three consecutive months led analysts to expect further cuts in September. However, new inflation figures have dashed these hopes, and rate cuts are now looking off the table. Globally, inflation remains as sticky as ever, with most regions opting to hold steady and wait for prolonged data to back up any cuts.

With interest rates remaining unchanged, what does this mean for our economies and banks? Globally, banks have been enjoying robust returns. In the last few weeks, many high-street banks posted their quarterly earnings, which looked positive across the board.

The Financial Times recently reported particularly high income in the APAC region for Standard Chartered and Pakistani banks [1] . High rates over the past two years have significantly boosted banks’ income. However, the latest quarterly earnings reveal the impact of these sustained rates.

Major American banks like JPMorgan Chase, Citibank, and Wells Fargo are reporting adjusted profit declines, as both consumers and businesses curb spending, reacting to the current environment.

Chris Stanley, Moody’s Banking Practice lead, noted, “Higher-for-longer interest rates, persistently high housing prices, softening used vehicle values, and signs of a cooling labour market merit focused scrutiny from the banking sector.” [2]

Amid the current political and geopolitical upheavals, the global economic outlook remains grim. Banks must recognise that even if rates eventually decrease, it’s highly unlikely that consumer behaviour will revert to pre-pandemic and pre-war norms.

Consumers are acutely aware of the rising costs of energy and living. I’m hard pressed to find anyone under 30 willing to take out a loan for frivolous expenses.

Banks should be vigilant in their forward planning and not view current income levels and rates as an anomaly. Instead, they should understand that the world is gradually shifting away from rampant consumption and in turn rampant borrowing.

Investing in the ‘S’ in ESG (Environmental, Social, and Governance), particularly through social bonds, could be a way to offer products that resonate with consumers.

This would give consumers way to directly spend on projects that impact them. Banking on traditional loans being taken out as they were in the past might not be a sustainable strategy if as a society our recovery will be slow, both from inflation and wars.

While inflation may be taking a breather, the financial landscape is far from stable. Banks and other financial institutions need to adapt to these changing times, focusing on sustainable practices and consumer-centric products to navigate the uncertainties ahead, rather than the current ‘higher for longer’ rhetoric that assumes when rates decline all will be well again.

Sources:

[1] https://www.ft.com/content/6d28145a-9ead-47c2-aa2a-e32936e8814e

[2] https://abcnews.go.com/Business/wireStory/jpmorgan-q2-profit-rose-25-bank-cashed-holdings-111875094

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