Inflation across OECD countries drops to lowest rate in two years

Stay informed with free updates

Inflation in the world’s richest economies dropped to its lowest rate in two years in October, giving central bankers more confidence they have raised interest rates high enough.

Data published on Tuesday by the OECD group of developed nations showed that the annual pace of consumer price growth in the OECD slowed to 5.6 per cent, down from 6.2 per cent in September and the lowest level since October 2021.

The figure is also below a peak of 10.7 per cent in October last year when energy and food costs shot up in the wake of Russia’s invasion of Ukraine.

The data suggests inflation is falling across the developed world, as headline price growth declined in 28 out of 38 member countries between September and October.

Central banks across the world have sharply raised interest rates over the past two years to bring inflation back to their target of price stability, but the Federal Reserve, the Bank of England and the ECB left interest rates unchanged at their last meeting.

“The recent few weeks have seen a change in rhetoric from developed market central bankers, with the hawkish messaging that has dominated much of the past two years finally softening,” said George Curtis, portfolio manager at TwentyFour Asset Management. “The market is now looking, not for the last hike, but the first cut.”

Separate data published last week for the eurozone indicated that the trend continued last month with inflation in the currency bloc falling more than expected to 2.4 per cent in November from 2.9 per cent the previous month.

Line chart of annual % change on consumer price index showing OECD inflation drops to the lowest rate in two years

The latest cooling of eurozone price growth, which brought it close to the ECB’s 2 per cent target, has been welcomed by senior rate-setters as a sign that their tighter monetary policy is proving effective.

Isabel Schnabel, an ECB board member, said the “quite remarkable” slowdown in underlying price pressures showed the bank was on track to achieve its objective and “made a further rate increase rather unlikely”.

Her comments, in an interview with Reuters, indicate a shift in sentiment by the most hawkish member of the ECB executive board, who only a month ago said it was too early to rule out further rate rises.

Schnabel still said it was too early to discuss when rates may start to be cut and warned there was likely to be “an uptick in inflation” in the coming months, as government subsidies that kept a lid on prices are withdrawn. “After more than two years of above-target inflation, we need to err on the side of caution,” she said, adding: “We must not declare victory.”

Tuesday’s data showed that the easing of the headline inflation was driven by cooling energy prices, which dropped by 4.8 per cent in October from the same month last year across the OECD.

Food inflation dropped to 7.4 per cent in October this year from 8.1 per cent in September, with declines registered in 32 out of 38 OECD member countries. Food inflation was well below its peak rate of 16.2 per cent in November 2022, hitting the poorest households the hardest.

The OECD noted that core inflation, which excludes food and energy, eased only marginally to 6.5 per cent in October from 6.6 per cent the previous month. For all G7 countries, excluding Japan, non-food or energy inflation was the largest contributor to October’s price growth.