Pause in hiking cycle amid higher Energy prices

Spillovers from energy prices to broader price setting remain limited, which has provided central banks with some breathing room. Thus, the ECB, the Fed and the Bank of Japan all left rates unchanged in October. However, we expect each of them to raise their policy rates again in December.

US CPI inflation increased to 3.7% in September, but core inflation remained muted, with modest signs of spillover from energy prices. Data for the UK and the euro area largely paints a similar picture. In the euro area, detailed data shows limited domestic price pressures and even a further decline in energy-sensitive inflation in September. Flash data releases from the major economies in the euro area suggest headline inflation continued to edge higher in October, but, so far, there are no signs that this is the case for core inflation.

Even though evidence from hard data remains very limited, there are other signs that cost pressures are mounting. Businesses in Europe have increased their selling price expectations, and China is becoming an increasingly inflationary force in the global economy with exports rising at still higher prices, not least driven by higher prices for microchips. October data continues to paint a picture of weak domestic demand but solid exports.

Elsewhere in Asia, the Bank of Japan now sees underlying inflation as "generally consistent" with its 2 percent target. In other words, the efforts initiated in 2013, when the 2% inflation target, heavy QE and later yield curve control were introduced, have finally borne fruit, and Japan is officially free of deflation.

Meanwhile, volatile energy markets continue to keep inflation concerns alive, with oil prices edging higher through October as markets speculate about the possibility of a renewed US attack on Iran after the US midterm elections. Natural gas prices in Europe climbed above EUR100 per MWh for the first time in four years.

The global economy continues to prove robust to higher energy costs, though. The US economy even picked up speed, with 0.8% qoq GDP growth driven by consumer spending and investment exceeding already high expectations. Annual GDP growth in Taiwan, the largest semiconductor producer in the world, was 14.4% in Q3, while semiconductor exports from South Korea were up 256% yoy in October, continuing to fuel the AI capital expenditure boom.

Excluding volatile data from Ireland, which do not reflect economic activity, euro area GDP growth was 0.2%, which is decent considering the current headwinds and the fact that there is not much spare capacity. PMIs suggest momentum weakened a bit across the major economies in October but remains particularly strong in the US.

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