Quick Bite – Keep your Eyes on The Big Picture
With all that is going on in the world today – war between Israel and Iran, war between Russia and Ukraine, the price of oil, gold, Bitcoin, the US dollar – it is often worthwhile to set aside the daily noise and remain focused on “The Big Picture”. With markets generally, the big picture is usually interest rates. And what happens with interest rates is usually a consequence of what is happening with inflation. So, let’s look at some longer term projections.
Source: Voronoi, Visual Capitalist
The information presented above is sourced from the latest OECD projections. The key takeaway: average headline inflation across the OECD is projected to be 4.2% in 2025, and 3.2% in 2026. In almost all countries, inflation is projected to be lower in 2026 than in 2025. That is good news (if the projections are correct). In 2024, inflation across the OECD was 5.2%; so, the trend is 5.2% to 4.2% to 3.2% (if the forecasts pan out).
We acknowledge that the OECD’s previous inflation projections have been revised upwards due to escalating trade barriers, and a lot of uncertainty remains. But the trend is very likely to be downwards, allowing central banks to lower rates.
While inflation is projected to fall in most economies, levels vary significantly between countries. Some emerging markets still face double-digit inflation, while others are nearing central bank targets.
In Turkey and Colombia, high inflation persists, with inflation in Turkey expected to hit 31.4% in 2025 and 18.5% in 2026. Colombia also sees above-average rates at 4.7% and 4.0% over the same period. Turkey’s exceptionally high inflation is largely driven by a sharp depreciation of the Turkish lira, which has amplified the price of imported energy and food.
The United States
The United States is projected to see inflation at 3.2% in 2025, dipping to 2.8% in 2026. While this moderation suggests inflationary pressures are easing, the Fed must tread carefully. Its dual mandate of maximum employment and price stability means it will likely maintain higher interest rates into 2025 to ensure inflation expectations remain anchored around the 2% target.
Last week, the US Fed’s FOMC kept rates steady at their June meeting, believing a reactive approach to policy is prudent. Broadly, the Fed remains positive on the health of the US economy. The FOMC’s median GDP forecast was revised down from 1.7% to 1.4% in 2025 and from 1.8% to 1.6% in 2026, reflecting the impact on confidence and economic activity of the Administration’s trade policies.
On inflation, the FOMC are clear that someone will eventually have to pay for the tariffs, and it is most likely to be the US consumer. Still, the net impact on consumer inflation is seen as modest and short lived. Annual headline and core inflation is forecast to top out around 3.0% at end-2025 then decelerate quickly back towards target, to 2.4% in 2026 and 2.1% come 2027.
Australia
For Australia, the projections are for inflation to be consistent at 2.3% across both this year and next – solidly within the RBA’s 2-3% target band. Domestically, all eyes were on the May Labour Force Survey last week and the level of employment edged slightly lower falling by –2.5k in May as commented upon in an earlier QB.
These latest labour market readings are unlikely to change the RBA’s pivot to lower rates. It remains to be seen whether the RBA decides to hold on 8 July, but if it does, it will very likely cut rates in August. The Board is cognisant of the downside risks to global and domestic growth. But the RBA have made it clear they want to adjust policy in a cautious and predictable manner, warranting another quarterly reading on inflation and time to assess global conditions before the balance of risks is re-evaluated.
The big picture is telling us that despite the noise and volatility, the direction of inflation and therefore of interest rates is down. That is usually good for markets.
