Our investment and economic outlook

The "last mile" of inflation reduction will require progress on shelter and services

_{Note: The chart shows year-over-year rates of change in the core U.S. Consumer Price Index, which excludes food and energy prices, starting in January 2020 and ending in March 2024. It also breaks those rates of change into three sources. Last month, according to the core CPI, shelter prices were 5.7% higher than they had been one year earlier. Shelter accounted for more than two-thirds of the 3.8% rise in total core CPI.}

_{Sources: Vanguard calculations using data from Refinitiv, as of March 31, 2024.}

Price increases for services excluding shelter have accelerated since December, propelled by a tight labor market and strong wage growth. Meanwhile, a year-long slowdown in the pace of shelter inflation has not been sharp enough to comfort the Fed. “Shelter inflation is critical to core inflation reaching the Fed’s target,” said Ryan Zalla, a Vanguard economist who studies price behavior. “If shelter inflation were to return to its prepandemic average of around 2.5%, core CPI would be approximately 2%.”

Stubborn shelter prices reflect heightened housing demand, supported by a strong labor market, and low supply, abetted by the reluctance of many homeowners to give up low mortgage rates by moving. “For shelter inflation to moderate, labor market conditions will have to materially weaken, or housing supply will have to increase,” Zalla said. “Meaningful changes in either appear unlikely to materialize soon.”

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of April 17, 2024.

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the December 31, 2023, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a range of 2 percentage points around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.

_{Notes:These probabilistic return assumptions depend on current market conditions and, as such, may change over time.}

_{Source: Vanguard Investment Strategy Group.}

_{IMPORTANT: The projections or 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 September 30, 2023. Results from the model may vary with each use and over time. For more information, please see the Notes section.}

Region-by-region outlook

United States

The latest inflation and labor market data imply that U.S. production of goods and services remains healthy and underscore our view that continued economic strength might prevent the Federal Reserve from cutting interest rates in 2024.

Measured by the Consumer Price Index, services prices were 5.3% higher on a year-over-year basis in March. Headline inflation advanced 3.5% year over year. We expect the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, which excludes food and energy prices due to their volatility, to record full-year 2024 inflation of about 2.6%.
The U.S. labor market remains irrefutably strong. Workers on private nonfarm payrolls earned an average of $34.69 per hour in March, up 4.1% year over year and above the 3%–3.5% annual rate that we view as noninflationary. We forecast a modest rise in the unemployment rate—from 3.8% to about 4%—by year-end.
We expect real (inflation-adjusted) U.S. economic growth of about 2% in 2024, higher than our initial estimate of about 0.5%.

China

China’s economy appeared to have made a solid start to 2024. But already questions have arisen about the sustainability of its growth after the second quarter, when year-over-year comparisons will be relatively easy.

Economic growth had softened by the second quarter of 2023, as the unleashing of strong, pent-up demand post-COVID couldn’t be maintained. That soft patch will flatter year-over-year performance in this year’s second quarter. Continued strong growth increases the prospect that, with its full-year growth target of “about 5%” well in sight, China may not address underlying economic imbalances.
Structural imbalances are likely to remain given the government’s policy priorities for investment and manufacturing upgrades over more direct measures to support consumer spending. We expect resulting supply-and-demand imbalances to continue to add to deflationary pressure amid weak consumer demand. To mitigate deflationary pressure, we forecast that the People’s Bank of China will cut its policy rate from 2.5% to 2.2% in 2024 and trim banks’ reserve requirement ratios.
We foresee elevated real (inflation-adjusted) interest rates continuing to weigh on prices. We recently lowered our forecast for full-year core inflation from a range of 1%–1.5% to 1% and our forecast for headline inflation from 1.5%–2% to less than 1%, well below the central bank’s 3% inflation target.

Euro area

Speaking on April 11, European Central Bank (ECB) President Christine Lagarde emphasized that the ECB would be “data-dependent, not Fed-dependent” in considering the appropriate policy rate. Her reference was to the risk that, by maintaining its current rate target for an extended period, the U.S. Federal Reserve could spur other central banks to leave their rate targets higher than they otherwise might. Cross-border gaps in policy rates can put downward pressure on currencies where rates are lower, increasing inflation risk.

Vanguard expects the ECB to trim its interest rate target by 25 basis points at each of its five remaining 2024 policy meetings, but rising energy prices skew risks toward a slower pace of easing. (A basis point is one-hundredth of a percentage point.) In our baseline case, the ECB’s policy rate ends 2024 in the 2.5%–3% range.
The euro area’s economy is showing tentative signs of having bottomed in the fourth quarter of 2023. We continue to expect 2024 economic growth of just 0.5%–1% amid still-restrictive monetary and fiscal policy and the lingering effects of Europe’s energy crisis.
The confluence of moderating wage growth, inflation expectations that remain in check, and lackluster demand supports our expectation that headline inflation will fall to 2% by September 2024 and core inflation will reach that same target by December. Headline prices were up 2.4% on a year-over-year basis in March. Core prices, which exclude the volatile food, energy, alcohol, and tobacco sectors, were up 2.9%.
We expect the unemployment rate to end 2024 around its current 6.5% level. The labor market may be softer than the unemployment rate would suggest, however; job vacancy rates, though still high, have receded, labor hoarding remains elevated, and the number of hours worked has stagnated.

United Kingdom

A continued moderation in wage growth and encouraging inflation news could set the stage for policy interest rate cuts this summer. Growth in average regular pay, which excludes bonuses, slowed to 6.0% between December and February, a sixth consecutive moderation in the rolling, three-month measure.

A reduction in the maximum price that energy suppliers can charge for a unit of energy should support falling headline inflation. Ofgem, Great Britain’s independent energy regulator, reduced its energy price cap for the April-June 2024 period by 12% following recent falls in wholesale energy prices. However, we’re watching crude oil prices amid heightened tension in the Middle East. We foresee headline inflation falling to just below 2% and core inflation falling to about 2.6% by year-end. The latest year-over-year readings, for March, were 3.2% and 4.2%, respectively.
Encouraging wage and inflation data underscore our view that the Bank of England will begin a series of interest rate cuts beginning in August, with the bank rate falling by a percentage point to 4.25% by year-end.
GDP data for January and February suggest the U.K. economy is emerging from a brief recession in the second half of 2023. We recently lowered our forecast for 2024 GDP growth to about 0.3%, down from an initial range of 0.5%–1%.
As in the euro area, the labor market’s gradual loosening appears mainly driven by reduced vacancies and fewer hours worked, rather than an increase in unemployment. We recently lowered our year-end 2024 unemployment rate forecast from 4.5%–5% to 4%–4.5%.

Emerging markets

Amid continued strength in the U.S. economy, we have upgraded our 2024 GDP growth forecast for Mexico. U.S. demand for Mexican goods has remained strong, and domestic wages and consumption are holding up. Our revised forecast is for 1.75%–2.25% growth, up from 1.5%–2% but still below trend amid restrictive monetary policy.

We continue to expect the world’s emerging markets to deliver economic growth of about 4%, on average, this year, led by growth of about 5% for emerging Asia.
We forecast growth in the 2%–2.5% range for emerging Europe and Latin America, though U.S. growth could have positive implications for Mexico and all of Latin America.
We expect that Mexico’s core rate of inflation will fall to 3.6%–3.8% and that the Banco de México will cut the overnight interbank rate to 9%–9.5% by year-end.

Canada

Canada’s economy avoided recession in the fourth quarter of 2023, thanks to the strongest population growth since 1957, which fueled consumption, and U.S. economic resilience, which buoyed exports. We continue to foresee below-trend growth in 2024 but have increased our growth forecast from about 1% to a range of 1.25%–1.5%. Risks skew to the downside amid the continued bite from restrictive monetary policy.

We expect that the Bank of Canada (BOC) will trim its overnight rate by 50 to 75 basis points this year, to a year-end range of 4.25%–4.5%. (A basis point is one-hundredth of a percentage point.) The first cut is likely to be announced on June 5, after the next central bank policy meeting.
As in the U.S., the “last mile” of inflation reduction could be the most challenging. We continue to foresee core inflation falling to a year-over-year pace within the BOC’s target range of 2%–2.5% by the end of 2024, with house prices moderating in response to declining affordability. Shelter prices, up 6.5% on a year-over-year basis last month, remain an upside risk amid immigration-fueled population growth.
Amid weak economic growth, we forecast that the unemployment rate will end 2024 in the 6%–6.5% range. It was 6.1% last month.

Australia

Sticky rent prices and a still-tight labor market position the Reserve Bank of Australia (RBA) to be among the last developed market central banks to ease policy rates. We expect the RBA to cut the cash rate by 50 basis points, to 3.85%, by year-end, and that the rate eventually will settle in the 3%–4% range, in line with our assessment of the neutral rate—the theoretical rate that would neither stimulate nor restrict the economy.

We foresee both headline and core inflation falling to around 3% year over year by the end of 2024, down from 3.4% and 3.9% on a “trimmed mean” basis, respectively, in February. We expect inflation to fall to the midpoint of the RBA’s 2%–3% target range in 2025.
We forecast a year-end unemployment rate of about 4.6%, as financial conditions tighten amid elevated interest rates. It was 3.7% in February.
Leading indicators suggest that broad economic activity is marginally below our estimate of trend or sustainable growth. We expect rising real household income, a reflating housing market, and improving business and consumer sentiment to support a gradual acceleration in growth. We continue to expect that Australia will avoid recession in 2024, with below-trend GDP growth of about 1%.

_Notes:

_{All investing is subject to risk, including the possible loss of the money you invest.}

_{Investments in bonds are subject to interest rate, credit, and inflation risk.}

_{Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.}

_{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. VCMM results will vary with each use and over time.}

_{The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.}

_{The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.}

_{Vanguard Mexico is not responsible for and does not prepare, edit, or endorse the content, advertising, products, or other materials on or available from any website owned or operated by a third party that may be linked to this email/document via hyperlink. The fact that Vanguard Mexico has provided a link to a third party's website does not constitute an implicit or explicit endorsement, authorization, sponsorship, or affiliation by Vanguard with respect to such website, its content, its owners, providers, or services. You shall use any such third-party content at your own risk and Vanguard Mexico is not liable for any loss or damage that you may suffer by using third party websites or any content, advertising, products, or other materials in connection therewith.}

The information contained on this site is published in good faith but no representation or warranty, express or implied, is made by Vanguard Mexico or by any person as to its accuracy or completeness and it should not be relied on as such Vanguard Mexico shall have no liability, for any loss or damage arising out of the use or reliance on the information provided including without limitation, any loss of profit or any other damage, direct or consequential. No information on this site constitutes investment, tax, legal or any other advice.

Vanguard Mexico shall have no liability for any data transmission errors such as data loss or damage or alteration of any kind, including, but not limited to, any direct, indirect or consequential damage, arising out of the use of this site.

We reserve the right to change, modify, add, or delete, any content and the terms of use of this website without notice. Users are advised to periodically review the contents of this website to be familiar with any modifications.

The information contained must not be reproduced, copied or redistributed in whole or in part.

Broker-dealers, advisers, and other intermediaries must determine whether their clients are eligible for investment in the products discussed herein.

Access to this site and the offering of securities described herein may be restricted in certain jurisdictions. The information contained in this site is for general guidance only, and it is the responsibility of any person or persons in possession of this material and wishing to make application for securities to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective applicants for securities should inform themselves of any applicable legal requirements, exchange control regulations and applicable taxes in the countries of their respective citizenship, residence or domicile.

THE CONTENTS OF THIS WEBSITE SHALL NOT BE UNDERSTOOD AS AN OFFER OR SOLICITATION TO BUY OR SELL SECURITIES IN BRAZIL AND VANGUARD IS NOT MAKING ANY REPRESENTATION WITH RESPECT TO THE ELIGIBILITY OF ANY USER OF THIS WEBSITE TO ACQUIRE THE INTERESTS IN THE SECURITIES DESCRIBED HEREIN UNDER THE LAWS OF BRAZIL. SUCH SECURITIES HAVE NOT BEEN REGISTERED IN BRAZIL AND NONE OF THE INTERESTS IN SUCH SECURITIES MAY BE OFFERED, SOLD, OR DELIVERED, DIRECTLY OR INDIRECTLY, IN BRAZIL OR TO ANY RESIDENT OF BRAZIL EXCEPT PURSUANT TO THE APPLICABLE LAWS AND REGULATIONS OF BRAZIL.

The content of this site does not constitute, and is not intended to constitute, a public offer in the Republic of Colombia, or an unlawful promotion of financial/capital market products. The financial products described herein may not be promoted or marketed in Colombia or to Colombian residents, unless such promotion and marketing is made in compliance with Decree 2555/2010 and other applicable rules and regulations related to the promotion of foreign financial/capital market products in Colombia.

The financial products described herein are not and will not be registered before the Colombian National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores) maintained by the Colombian Financial Superintendency, or before the Colombian Stock Exchange. Accordingly, the distribution of any documentation in regard to the financial products described here in will not constitute a public offering of securities in Colombia.

The financial products described herein may not be offered, sold or negotiated in Colombia, except under circumstances which do not constitute a public offering of securities under applicable Colombian securities laws and regulations; provided that, any authorized person of a firm authorized to offer foreign securities in Colombia must abide by the terms of Decree 2555/2010 to offer such products privately to its Colombian clients.

The information contained herein on financial products conforms to General Rule No. 336 of the Chilean Financial Market Commission (Comisión para el Mercado Financiero). The information deals with securities not registered under Securities Market Law, nor in the Securities Registry nor in the Foreign Securities Registry of the Chilean Financial Market Commission, and therefore such securities are not subject to its oversight. Since such securities are not registered in Chile, the issuer is not obligated to provide public information in Chile regarding the securities. The securities shall not be subject to public offering unless they are duly registered in the corresponding Securities Registry in Chile. The issuer of the securities is not registered in the Registries maintained by the Chilean Financial Market Commission, therefore it is not subject to the supervision of the Chilean Financial Market Commission or the obligations of continuous information

La información acerca de productos financieros en este sitio se acoge a la norma de carácter general No. 336 de la Comisión para el Mercado Financiero. Dicha información versa sobre valores no inscritos bajo la Ley de Mercado de Valores en el Registro de Valores o en el Registro de Valores extranjeros que lleva la Comisión para el Mercado Financiero, por lo que tales valores no están sujetos a la fiscalización de ésta. Por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respecto de esos valores. Los valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente. El emisor de los valores no se encuentra inscrito en los Registros que mantiene la Comisión para el Mercado Financiero, por lo que no se encuentra sometido a la fiscalización de la Comisión para el Mercado financiero ni a las obligaciones de información continua.

The securities described herein have not been registered under the Peruvian Securities Market Law (Decreto Supremo No 093-2002-EF) or before the Superintendencia del Mercado de Valores (the “SMV”). There will be no public offering of the securities in Peru and the securities may only be offered or sold to institutional investors (as defined in Appendix I of the Institutional Investors Market Regulation) in Peru by means of a private placement. The securities offered and sold in Peru may not be sold or transferred to any person other than an institutional investor unless such securities have been registered with the Registro Público del Mercado de Valores kept by the SMV. The SMV has not reviewed the information provided to the investor. Access to this site exclusive to institutional investors in Peru and is not intended for general public.

The financial products described herein may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda. Additionally, non-Bermudian persons may not carry on or engage in any trade or business in Bermuda unless such persons are authorized to do so under applicable Bermuda legislation. Engaging in the activity of offering or marketing the financial products described herein in Bermuda to persons in Bermuda may be deemed to be carrying on business in Bermuda.

Vanguard Mexico does not intend, and is not licensed or registered, to conduct business in, from or within the Cayman Islands, and the interests in the financial products described herein shall not be offered to members of the public in the Cayman Islands.

The financial products described herein have not been and will not be registered with the Securities Commission of The Bahamas. The financial products described herein are offered to persons who are non-resident or otherwise deemed non-resident for Bahamian Exchange Control purposes. The financial products described herein are not intended for persons (natural persons or legal entities) for which an offer or purchase would contravene the laws of their state (on account of nationality or domicile/registered office of the person concerned or for other reasons). Further, the offer constitutes an exempt distribution for the purposes of the Securities Industry Act, 2011 and the Securities Industry Regulations, 2012 of the Commonwealth of The Bahamas.

The contents of this site are not, and are not intended as, a public offer or advertisement of, or solicitation in respect of, securities, investments, or other investment business in the British Virgin Islands (“BVI”), and is not an offer to sell, or a solicitation or invitation to make offers to purchase or subscribe for, any securities, other investments, or services constituting investment business in BVI. Neither the securities mentioned in this document nor any prospectus or other document relating to them have been or are intended to be registered or filed with the Financial Services Commission of BVI or any department thereof.

This site is not intended for individuals that are members of the public in the BVI or otherwise to individuals in the BVI. The funds are only available to, and any invitation or offer to subscribe, purchase, or otherwise acquire such funds will be made only to, persons outside the BVI, with the exception of persons resident in the BVI solely by virtue of being a company incorporated in the BVI or persons who are not considered to be “members of the public” under the Securities and Investment Business Act, 2010 (“SIBA”).

Any person who has access to this site in the BVI (other than a person who is not considered a member of the public in the BVI for purposes of SIBA, or a person resident in the BVI solely by virtue of being a company incorporated in the BVI and this document is received at its registered office in the BVI) should not act or rely on this document or any of its contents.

The sale of any financial product included herein must qualify as a private placement pursuant to section 2 of Uruguayan law 18.627. Vanguard Mexico represents and agrees that it has not offered or sold, and will not offer or sell, any of the financial products described herein to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. Neither the financial products described herein nor issuer are or will be registered with the Superintendency of Financial Services of the Central Bank of Uruguay to be publicly offered in Uruguay.”

The financial products describe herein correspond to investment funds that are not investment funds regulated by Uruguayan law 16,774 dated 27 September 1996, as amended.

The financial products described herein are only available for investment by non-U.S. investors, and access to this site is restricted for retail investors in the United States. Any entity responsible for forwarding the contents of this site, which is produced by Vanguard Mexico in Mexico, to other parties takes responsibility for ensuring compliance with applicable securities laws in connection with its distribution.