Inflation has been a core topic since 2021, when inflation started to soar around the world. In response to this, the majority of central banks have taken the step of significantly increasing interest rates in order to combat the steep rise in inflation. Between the second half of 2022 and the first half of 2023, these measures, in conjunction with a stabilising economy, contributed to a reduction in inflation. By the end of 2023, inflation had fallen below 4% in most countries, as illustrated in Figure 1. While there have been significant differences in the prior years, the subsequent development has been consistent, albeit with varying magnitudes. In 2024 to date, inflation has stabilised, with most economies showing inflation rates between 2% and 4%. Switzerland is an exception, with inflation closer to 1%. In contrast to earlier expectations, inflation has proven to be more persistent than anticipated, with rates remaining above the frequently targeted maximum of 2%. The most notable exception was the UK, which has been hit hardest by inflation for the same reasons as other economies, but they still had to deal with the consequences of Brexit. Great Britain started in 2024 with an inflation of 4% and has since come down to 2%, where it remains steadily, whereas most other economies’ inflation has remained mostly flat throughout 2024.
As mentioned previously, central banks significantly raised interest rates to combat soaring inflation. The increases commenced at the end of 2021 and continued well into the summer of 2023, and autumn of 2023 for some countries. Since, interest rates were kept at these high levels for most of 2024 with some relief in some economies more recently. In March 2024, Switzerland became the first country to cut interest rates, followed by another reduction in June 2024. It is noteworthy that Switzerland is the only country where inflation has remained below the 2% target maximum since the summer of 2023. In June 2024, the European Central Bank followed suit by reducing interest rates (main refinancing operations rate) to 4.25%. More recently, the central bank hinted at a slower pace of interest rate cuts than anticipated after the initial cut. In August 2024, the Bank of England became the last economy to cut interest rates by 25bps to 5% in response to the promising development in inflation. In the United States, interest rates have remained unchanged since July 2023, currently sitting at 5.25%. The Fed has been hesitant to lower interest rates amid concerns about the stickiness of their inflation, as inflation has remained relatively steady since June 2023. It is also worth noting that Japan's situation is completely different. The country is renowned for its distinctive approach to monetary policy, exemplified by its central bank. The country maintained its negative interest rate throughout the period of the pandemic and its aftermath. In March 2024, the Bank of Japan increased interest rates and followed with an additional hike in July 2024. The first hike was particularly noteworthy, as the country had not raised its interest rates in 17 years. The second hike was to address two issues. The central bank also announced a bond tampering programme to boost the economy and raised interest rates significantly to combat the weakening Japanese Yen.

​The macroeconomic environment remains challenging for all market participants. Aside from the high volatility in the market, the uncertainty about future interest and inflation rates makes the investment processes much more difficult. In the US, the situation is decent compared to most other countries. Inflation is back at a moderate level of 3.2%, despite the recent increase from 3% in June. However, the interest rate is still very high at 5.25%-5.5%, which adds significant pressure to companies, especially if there is a recession. In the EU, the situation is less promising, as inflation remains above 6% with only slightly lower interest rates at 4.25%-4.5%. Despite this, the EU area is recovering following the development of the US with a delay of a couple of months. It is likely that inflation will be down to manageable levels by the end of 2023, assuming there is no further escalation in the war between Russia and Ukraine. In the UK, the situation is more precarious. Inflation is still close to 8% and has remained above 10% for almost a year. In addition, the BoE’s interest rates are at equal levels as the Fed’s. With an already struggling economy, this only increases the issues. However, the development in the last few months has been positive with inflation coming down. This might ease the immediate pressure, but the economy is still under a lot of pressure. Figure 1 summarizes the development of inflation and interest rates in the US, the EU, and the UK.

​With the currently pessimistic view of 2023, markets are under substantial pressure. Most market participants are expecting a recession in 2023/2024. High inflation, steep interest rate hikes, and historical yield curve inversions are just a few indicators that suggest tough times ahead. However, there are some indicators that provide hope that a larger crisis can be avoided. While inflation is high, it has been steadily decreasing, at least in the US. Rate hikes are also expected to increase only slightly in 2023. Nonetheless, this provides little help in avoiding a recession, as it is still unclear how fast inflation will drop down to the acceptable 2% and below range. Furthermore, interest rates will remain high for 2023 with a low to moderate probability of rate cuts in 2023. These still pressure businesses that are expected to earn less in 2023, as consumers have exhausted most of their resources in dealing with the impact of inflation. The biggest saving grace currently is the labor market, which functions very well. In Western countries, the unemployment rates are close to record lows of the past few decades. In the US and the UK, the unemployment rate is 3.7%. In the EU, the unemployment rate is 6%, while Switzerland sees an unemployment rate of 2.2%. Figure 1 shows the jobless claims in the US in 2022. While there has been some variation during 2022, these were small and at very low levels historically. It is even more promising when addressing the private sector. Since early 2021, the private sector in the US is adding jobs at a constant pace. Figure 2 shows this development. 

Inflation was a core issue in 2022 and remains to be one in 2023. In the US, inflation started to decline in the summer of 2022 and remains currently at a level of 7.1%. Contrarily, in Europe and the UK, inflation remains a huge issue and has barely declined from its peak in 2022. It remains at 11.1% for the EU and at 10.7% for the UK. The difference between the inflation can largely be attributed to two factors. Firstly, the Fed hikes interest rates more aggressively than its European counterparts. This led to a quicker response to inflation. Secondly, Europe is more directly affected by the war between Russia and Ukraine and is largely dependent on Russian oil and gas, which soared in price following the war. Contrarily to other European countries, Switzerland managed to keep inflation relatively low with a peak in late summer 2022 at 3.5% and 3% currently. Switzerland managed to avoid high inflation due to its strong currency and relatively low demand for fossil fuels, as most of its electricity stems from hydropower and nuclear power. In Asia, both Japan and China also experience limited inflation issues. Japan achieved this through its central bank which continuously intervenes with large-scale monetary easing. Despite the low inflation, Japan is still suffering, as wages remain stagnant unlike in other major economies where it helps offset the higher inflation to some degree. China does not face an inflation problem, due to their different handling of the Covid crisis. Unlike most economies, they did not provide large stimuli to the economy. Additionally, their zero-Covid policy substantially reduced household demands. Figure 1 shows a summary of the inflation rates across the highlighted economies during 2022. Regarding 2023, it is widely expected that inflation, especially in high-inflation countries, will come down. For instance, in the US, it is expected that inflation will be around 4% on average, and close to the 2% Fed target by the end of the year. Inflation forecasts in the EU and the UK are more difficult to estimate, due to their dependency on the war and its outcome. Additionally, unlike in the US, inflation has not really started to decrease. Assuming further strong interventions by the European central banks, it is expected that inflation will drop substantially. The ECB expects the average inflation to be around 5%-6% during 2023 with inflation slightly below 4% by the end of 2023. In the short term, Europe will be under pressure and the measures take time to become effective, as shown in the example of the US. Despite a similar outlook to the US, albeit with a delay of around half a year, it is less promising. One important wildcard is energy prices, which are strongly linked to the war. While the EU managed to get its oil largely from other sources than Russia, it still needs Russia, and gas is not as easily substitutable. With the prospect of Russia’s supply cut and China reopening, prices of energy sources are likely to increase. Depending on the scale, if it occurs, the anticipated target may not be reached and inflation will remain higher than the target. In Switzerland, inflation is expected to remain around the 3% mark for 2023. Given the strong involvement of the BoJ, Japan’s inflation is expected to end the year 2023 below the 2% inflation mark. It is additionally expected that wages will rise for the first time in three decades. Inflation in China is expected to rise to around 2% in 2023. This is a combination of the reopening of the economy and the end of the zero-Covid policy. This will lead to an increase in economic activity and the necessity for further energy. Additionally, the price pressure across will also be felt in China, once demand picks up again. The interest rate hikes by most countries have been another crucial topic during 2022. So far, the hikes have shown limited effectiveness in dealing with soaring inflation. In high-inflation countries, it was effective for the US and had little impact on the European countries. However, this discrepancy is likely due to the steeper hikes in the US and less dependency on the war by the US. The US employed the strongest measures, as it hiked from 0% at the beginning of 2022 to 4.25% at the end of 2022. In contrast, the ECB just started hiking in June 2022 at -0.5%, which increased to 2% by the end of 2022. The BoE employed a mixture of the two. The UK started hiking at the end of 2021 but hiked in smaller steps than the US. Towards the end of 2022, it increased the step size and is currently at 3.5%. Switzerland started hiking earlier than the ECB, despite substantially lower inflation. Switzerland’s prime rate became positive for the first time in years in September 2022. Currently, the prime rate is sitting at 1%. Japan was one of the exceptions, as the BoJ did not hike at all. Its prime rate remains at -0.1%. However, the central bank still strongly intervened in the market as elaborated previously. The People’s Bank of China even lowered its prime lending rate over 2022, albeit to a minimal degree. Currently, the rate is at 3.65%. There is a strong consensus for the year 2023 in the US and Japanese markets. Most market participants expect the Fed to keep raising interest rates to around 5%-5.25%. The Fed is likely to do this in smaller steps than previously. Nonetheless, this level should be reached by the end of Q1 2023. Afterward, a majority of institutions do not expect further hikes or cuts in 2023. The remainder anticipates potential interest rate cuts in Q4 2023. The exact outcome of potentially further hikes or cuts largely depends on the state of the US economy in the latter part of 2023. While the measures seem to be effective and inflation is going down considerably, the risk of a recession is considerable. This largely stems from substantially higher financing costs for businesses, and lower demand from consumers as Covid reserves are exhausted and households feel the pressure from the inflation over the past year. Given that the BoJ has not intervened by raising interest rates, it is not expected that it will in 2023. It is more likely that it will continue its qualitative and quantitative easing philosophy employed so far. In particular, as Japan does not face an imminent inflation problem. With expected wages adjusted, the pressure of inflation should also be eased without a strong necessity to make policy adjustments. For the EU, it is expected that rates will be hiked further to combat the prevalent inflation. Market participants expect interest rates of around 3%, which should be reached during Q2 2023. For the UK, additional hikes of 1% are expected, resulting in interest rates of around 4.5% for 2023. For both economies, no rate cuts are expected in the latter half of 2023. In Switzerland, the SNB is anticipated to hike another 0.5% in 2023 with no rate cuts as well. ​