In a challenging turn for global monetary policy, central banks are grappling with a persistent and stubbornly high core inflation rate, threatening to derail a widely anticipated cycle of interest rate cuts. Recent data from major economies, including the United Kingdom and the United States, reveals that while overall, or “headline,” inflation has been trending downward, the underlying price pressures are proving far more resilient than policymakers had hoped. This presents a complex dilemma: whether to continue easing monetary policy to support slowing economies or to hold firm to prevent inflation from becoming entrenched.
A prime example is the Bank of England, which just this month cut its policy rate to 4% despite consumer price inflation rising to 3.8% in July, well above its 2% target. The bank’s Monetary Policy Committee was reportedly split on the decision, highlighting the internal conflict central bankers face. A significant factor in this persistence is core inflation, which strips out volatile components like food and energy prices to provide a clearer picture of underlying price trends. Core inflation is often seen as a better indicator of future inflation because it reflects domestic demand pressures, wage growth, and service prices—factors that are less susceptible to short-term global shocks.
The concern for central banks is that persistent core inflation could lead to a wage-price spiral, where higher prices lead to demands for higher wages, which in turn push prices even higher. This kind of self-reinforcing dynamic could make it incredibly difficult to bring inflation back down to target levels without a more severe economic slowdown. As a result, even as some central banks have begun to ease their restrictive stance, they remain cautious. For instance, the European Central Bank paused its rate-cutting campaign in late July, citing a strengthening eurozone economy.
The policy conundrum is compounded by a global environment of slowing economic growth and evolving geopolitical risks. Policymakers must now balance the need to curb inflation against the risk of stifling economic activity and pushing their countries into a deeper recession. The recent rise in long-term interest rates, which has occurred despite central bank easing, further complicates the picture, as it reflects market concerns over future inflation and fiscal sustainability.
For consumers and businesses, this means the relief from high borrowing costs may be slower and bumpier than expected. Financial markets, too, are adjusting to the new reality, with investors scaling back expectations for aggressive rate cuts. As central banks prepare for their upcoming policy meetings, all eyes will be on their communications. The language they use to justify their decisions—whether they lean on the need for continued vigilance against inflation or on the risks to growth—will provide critical clues about how they intend to navigate this precarious path.
