Jumana Saleheen, Vanguard European chief economist, explores the inflation and monetary policy outlook in the UK and euro area as part of the mid-year update to our economic and market outlook.
Developed market economies have proved resilient in the face of persistent inflation, tight labour markets and rising policy interest rates. But we anticipate some economic weakness in the months ahead.
Central banks have needed to raise monetary policy rates higher than we had anticipated. The last leg of inflation reduction to target levels may be the most challenging, in our view.
In the UK, falling equity valuations and rising bond yields have boosted our expectations for 10-year annualised returns in British pounds.
There’s been progress in the fight against inflation. But it’s too early to declare victory. Vanguard foresees developed market core inflation (which excludes food and energy prices) continuing to fall through to the end of 2023 from recent generational highs.
Notes: We use year-over-year changes the core consumer price index (CPI) for all locations. Year-end 2023 figures are Vanguard forecasts.
Sources: Vanguard calculations, using data from the U.S. Bureau of Labor Statistics, Eurostat, and the UK Office for National Statistics accessed through Macrobond on 15 June 2023.
We expect continued progress in the fight against inflation, with central banks having to keep interest rates in restrictive territory for longer. But inflation and monetary policy have elevated the risk of recession and we anticipate some economic weakness to come in the months ahead.
Please note that inflation forecasts are for core inflation, which excludes volatile energy and food prices. Our forecast for the United States year-end monetary policy rate reflects the low end of the Federal Reserve's federal funds target range.
Notes: Figures related to economic growth, inflation, monetary policy and unemployment rate are Vanguard forecasts for the end of 2023. Growth and inflation are comparisons with the end of the preceding year; monetary policy and unemployment rate are absolute levels.
Source: Vanguard, as of 26 June 2023.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of 31 December 2021; 31 December 2022; and 31 May 2023. Results from the model may vary with each use and over time.
Note: Figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Indices used in VCMM calculations: UK equities: Bloomberg Equity Gilt Study from 1900 to 1964, Thomson Reuters Datastream UK Market Index from 1965 to 1969; MSCI UK thereafter; global ex-UK equities: S&P 90 Index from January 1926 to 3 March 1957; S&P 500 Index from 4 March 1957 to 1969; MSCI World ex-UK Index from 1970 to 1987; MSCI AC World ex-UK thereafter; UK aggregate bonds: Bloomberg Sterling Aggregate Bond Index; Global ex-UK bonds: Standard & Poor’s High Grade Corporate Index from 1926 to 1968, Citigroup High Grade Index from 1969 to 1972, Lehman Brothers US Long Credit AA Index from 1973 to 1975, Bloomberg US Aggregate Bond Index from 1976 to 1990, Bloomberg Global Aggregate Index from 1990 to 2001; Bloomberg Global Aggregate ex GBP Index thereafter.
Watch this summary video of the key takeaways from our mid-year 2023 outlook, where Joe Davis, Vanguard global chief economist, discusses sticky inflation, central banks’ reply and a silver lining for investors.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.
The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.
The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.
Issued in Switzerland by Vanguard Investments Switzerland GmbH.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2023 Vanguard Group (Ireland) Limited. All rights reserved.
© 2023 Vanguard Investments Switzerland GmbH. All rights reserved.
© 2023 Vanguard Asset Management, Limited. All rights reserved.