The article below is a revised version of Chris Giles on Central Banks newsletter. Premium subscribers can subscribe to receive the newsletter every Tuesday by clicking here. Standard subscribers have the option to upgrade to Premium or explore all FT newsletters.
As the year draws to a close, it’s a good time to reflect on 2024 and extract valuable lessons. While inflation rates have dropped and central bank forecasts have improved, challenges still persist. The public remains disgruntled, financial markets have struggled to predict central bank actions, and the economic conditions in advanced economies are less than ideal. Here are five key takeaways for 2025.
- Close to Victory on Inflation
Inflation rates in most advanced economies are hovering near the standard 2% target. While there are slight deviations, there are no definitive signs of inflation straying far from target levels. A statistical approach, such as the "FT core inflation" model, provides a more accurate assessment of underlying inflation trends. - Challenges in Controlling Inflation
Defining the last mile of inflation control has proven to be difficult. While there have been concerns about rising inflation, the latest data indicates that the situation is not as dire as initially perceived. Different measures and time periods offer a more nuanced view of the inflation scenario in various economies. - Improved Forecasting by Central Banks
Central banks have shown better accuracy in forecasting inflation and economic trends. While there have been slight revisions, overall, their predictions have been more reliable. However, the European Central Bank (ECB) has revised its growth forecasts downwards, indicating a more cautious outlook. - Financial Market Failures
Financial markets have struggled to forecast interest rates accurately, leading to volatile predictions throughout the year. This unpredictability can be attributed to data-dependent reactions and uncertain Fed policies. Academic economists have also failed to provide accurate predictions, highlighting the challenges in forecasting economic trends. - Public Perception of Inflation
Surveys indicate that the public has a poor understanding of inflation and strongly dislikes periods of price increases. This sentiment has been reflected in electoral outcomes worldwide, with governing parties facing backlash due to inflation concerns.In conclusion, while progress has been made in controlling inflation and improving forecasting accuracy, challenges persist in financial markets and public perception. Central banks need to navigate these complexities carefully to ensure economic stability and growth in the coming year.