While trade wars and Brexit keep the politicians busy, central bankers are concentrating on the economy in the run-up to crucial interest rate decisions. This week the European Central Bank meets, next week it’s the turn of the Federal Reserve and the following week it’s the Bank of England. And they will all have a laser focus on growth and inflation. 

Core inflation - a less volatile measure than headline inflation that strips out food and energy costs - has been on the rise since 2015. In the aftermath of the global financial crisis, there was plenty of spare capacity in the economy and inflation was muted as a result. In recent years, that capacity has shrunk. Employment is nearing its full level, leading to wage pressures. The story in the UK is slightly different because it’s the currency, which depreciated following the Brexit referendum, that has largely driven inflation.

We expect global growth to recover in 2020, mainly driven by easier monetary conditions, although the recovery will be subdued. Bond yields have fallen as central banks in the US, Europe and emerging markets undertake synchronised easing and, in some cases, asset purchases, stimulating the economy. China also has supportive fiscal and monetary policies. In the UK, prices should rise due to imported inflation via a still weak currency and mounting wage pressures. But the growth outlook has yet to improve significantly and may struggle to do so until there is much greater certainty around the UK’s long-term relationship with the EU.

From an investment standpoint, markets may have too high expectations of UK inflation, especially as the country could adopt a new method of calculating inflation that would systematically bring the rate down. But globally, inflation-linked bonds appear very cheap in a climate of rising inflation, tight labour markets and potential fiscal stimulus. 

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