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Inflation in the world’s richest economies fell to its lowest level in two years in October, giving central bankers more confidence to raise interest rates high enough.
Data released by the OECD developed country group on Tuesday showed that annual growth in consumer prices in the OECD slowed to 5.6% from 6.2% in September, the lowest level since October 2021.
The figure is also down from a peak of 10.7% last October, when energy and food costs soared after Russia invaded Ukraine.
Data show that inflation rates in developed countries are falling between September and October, with overall price growth declining in 28 of the 38 member countries.
Central banks around the world have raised interest rates sharply over the past two years to bring inflation back to their price stability targets, but the Federal Reserve, Bank of England and European Central Bank kept rates unchanged at their last meetings.
“The rhetoric from developed market central bankers has changed in recent weeks, with the hawkish messaging that has dominated much of the past two years finally softening,” said George Curtis, portfolio manager at TwentyFour Asset Management. “Markets are not focused on the end now. Not one rate hike, but the first rate cut.”
Separate data released by the Eurozone last week showed that this trend continued last month, with Eurozone inflation falling to 2.4% in November from 2.9% last month, a larger-than-expected decline.
The latest slowdown in euro zone price growth, closer to the European Central Bank’s 2% target, was welcomed by senior rate setters as a sign that its tight monetary policy is proving effective.
ECB board member Isabelle Schnabel said a “quite significant” slowdown in underlying price pressures suggested the bank was achieving its goals and that “further interest rate hikes are unlikely.”
Her comments in an interview with Reuters signaled a shift in sentiment from the most hawkish member of the ECB’s executive committee, who just a month ago said it was too early to rule out further rate hikes.
Schnabel still said it was too early to discuss when to start cutting interest rates and warned that “inflation could rise” in the coming months as government subsidies that restrain prices are removed. “After more than two years of inflation above target, we need to proceed with caution,” she said, adding: “We must not declare victory.”
Data on Tuesday showed that the easing in headline inflation was driven by cooling energy prices, with OECD energy prices falling 4.8% in October from a year earlier.
Food inflation fell from 8.1% in September to 7.4% in October this year, with 32 of the 38 OECD member countries experiencing a decrease in food inflation. Food inflation is well below its peak of 16.2% in November 2022, hitting the poorest households hardest.
The OECD noted that core inflation, which excludes food and energy, eased only slightly to 6.5% in October from 6.6% the previous month. For all G7 countries (excluding Japan), non-food or energy inflation was the largest contributor to price growth in October.