Inflation is proving stickier than expected in the U.S. and Europe, creating a headache for central bankers and sowing doubts on whether investors are too optimistic about the world economy.

The decline in inflation from highs of around 9% to 10% across advanced economies in 2022 represent the easy gains, as supply-chain blockages eased and commodity prices, especially for energy, normalised.

The “last mile” is proving tougher . Underlying inflation, which excludes volatile food and energy prices, slowed to 3% in the second half of last year across advanced economies but has since moved up to 3.5%, according to JP Morgan estimates.

That is forcing investors to rethink bets that inflation would steadily decline to central banks’ targets, generally around 2%. There are even concerns it could surge again, mirroring the second wave that characterised the high inflation of the 1970s.

Economists’ and central banks’ forecasts of sustained falling inflation depend on “strong gravitational forces that are not yet validated in global labor costs, short-term expectations, or in recent signals from commodity markets,” JP Morgan wrote in a note. Services inflation remains elevated while goods prices, which had fallen last year, are now moving higher, it noted.

Waiting on the last mile

Central bankers say they expected the last mile of falling inflation to be bumpy. Yet they are also signaling their willingness to wait before cutting interest rates. Fewer, or no, rate cuts would have sweeping repercussions for the global economy and markets, whose recent rally began after a narrow majority of Federal Reserve officials recently reaffirmed projections to cut interest rates three times this year.

On Friday, the U.S. Commerce Department reported that the price index of personal-consumption expenditures, the Fed’s preferred indicator of inflation, rose a relatively tame 2.5% in the 12 months through February, up modestly from 2.4% in January. Beneath the surface, the trend was less comforting. The index excluding food and energy climbed by 3.5% on an annualised basis in the three months through February, up from around 2% late last year.

“These shorter-term inflation measures are now telling me that progress has slowed and may have stalled,” Fed governor Christopher Waller said in a speech Thursday, before the latest inflation data.

“In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future,” Waller said.

Fed Chair Jerome Powell struck a more balanced note Friday, saying inflation is on a sometimes bumpy path toward 2%, and strong economic growth allows policymakers to wait. “Is progress on inflation going to slow for more than two months?…We’re just going to have to let the data tell us that,” Powell said in an interview at the San Francisco Fed.

Joachim Nagel , president of Germany’s Bundesbank and a member of the European Central Bank’s rate-setting committee said in late February that underlying inflation in the eurozone was still 2 percentage points higher than its 1999 to 2019 average.

“If we reduce interest rates too early or too sharply, we run the risk of missing our target,” and might need to raise interest rates again, he said. He highlighted a recent International Monetary Fund report that found four out of every 10 inflation shocks since the 1970s had yet to be overcome even after five years.

In Italy, underlying inflation climbed to 2.4% in March from 2.3% the previous month, according to data published Friday. French headline inflation cooled to 2.3% in March, but services prices remained sticky, rising by 3% from a year earlier.

Why is inflation proving stubborn?

Despite the sharp interest-rate increases of the past two years, economic growth is resilient, especially in the U.S. The Atlanta Fed said Friday its real-time indicator of first quarter U.S. economic growth ticked up to 2.3% from 2.1%. Consumer spending, adjusted for inflation, increased by around 5% on an annual basis in February, the Commerce Department said.

“The unexpected strength of real consumption” means “there is still no rush to cut interest rates,” said Paul Ashworth , an economist with Capital Economics.

While Europe’s growth has stalled since late 2022, recent business surveys suggest the outlook is brightening. Meanwhile, job creation has been strong on both sides of the Atlantic, and wage growth remains high, partly reflecting tight labor markets. Wages are an important input to services-price inflation in the eurozone, which has been running at a 4% annual rate since November.

March inflation data for the entire eurozone will be published on Wednesday. ECB officials have indicated they could start to cut interest rates in June from the current 4% level, while the subsequent pace of cuts after that is unclear.

Central banks may be part of the problem

Central banks themselves may be inadvertently adding to inflation pressure. By signaling a pivot toward interest-rate cuts last fall, they pushed global borrowing costs down and asset prices up, supporting spending.

Some factors favour inflation declining further. In both the U.S. and Europe, a surge of immigration could help keep a lid on wage increases.

The U.S.—but not Europe—is also seeing big increases in productivity, that is output per worker, which helps to offset high wage growth. It is unclear, however, how long that will last. The pandemic might have changed how Americans work and use technology, but “once we have made those changes, they’re done, so I don’t see this as a driver of sustained productivity growth,” the Fed’s Waller said.

Meanwhile, oil prices have risen recently, which could push up headline inflation.

To offset a slumping property market, China has dramatically boosted manufacturing capacity and exports, which have weighed on global goods inflation. But its export prices have recently started to increase, according to JP Morgan.

If central banks react to stubborn inflation by backing away from rate cuts, that would put pressure on both heavily indebted governments and employers. That could test central banks’ will to finish the last mile and push inflation all the way to target.

Higher government spending on defence and green energy, and geopolitical tensions that crimp global trade, are likely to pressure central banks to tolerate higher inflation over the coming years, according to a Brookings Institution paper published in March.

“A strengthening of central bank independence combined with a more credible public debt policy is likely needed,” said the paper, by economist Kenneth Rogoff of Harvard University and three co-authors.

Daniel Kahneman explained investors to themselves.

A psychologist at Princeton University and winner of the Nobel Prize in economics, Kahneman died on March 27, age 90.

Before the pioneering work done by Kahneman and his research partner, Amos Tversky, who died in 1996, economists had assumed that people were “rational,” meaning we are self-interested, use all available information to make unbiased decisions, and our preferences are consistent.

Kahneman and Tversky showed that’s nonsense. Their findings, directly or indirectly, inspired change across the business world, including the redesign of organ-donation programs and improvements in planning for multibillion-dollar infrastructure projects .

Kahneman was a pioneer of what became known as behavioural economics, although he always saw himself as a psychologist. Investors who take Kahneman and Tversky’s lessons to heart can minimise fees, losses and regrets. Kahneman may well have had more influence on investing than anyone else who wasn’t a professional investor.

I first met Danny, as everyone called him, at a conference on behavioural economics in 1996. For years, as an investing journalist, I had wondered: Why are smart people so stupid about money?

About five minutes into Danny’s presentation, I realised he had the answers—not only to that question, but to nearly every mystery of financial behaviour.

Why do we sell our winners too soon and hang onto our losers too long? Why don’t we realize that most hot streaks are just luck? Why do we say we have a high tolerance for risk and then suffer the torments of the damned when the market falls? Why do we ignore the odds when we know they’re stacked against us?

Danny paced softly back and forth at the front of the room, his blue-green eyes sparkling with amusement as he documented these behaviours and demolished conventional economic theory.

For decades, he and Tversky had conducted experiments, almost childlike in their simplicity, to see how people really think and behave.

No, Danny said, money lost isn’t the same as money gained. Losses feel at least twice as painful as gains feel pleasant. He asked the conference attendees: If you’d lose $100 on a coin toss if it came up tails, how much would you have to win on heads before you’d take the bet? Most of us said $200 or more.

No, people don’t incorporate all available information. We think short streaks in a random process enable us to predict what comes next. We think jackpots happen more often than they do, making us overconfident. We think disasters are more common than they are, making us suckers for schemes that purport to protect us.

Ask people if they want to take a risk with an 80% chance of success, and most say yes. Ask instead if they’d incur the same risk with a 20% chance of failure, and many say no.

Noting that the stocks people sell outperform the ones they buy, Danny joked that “the cost of having an idea is 4%.”

I wasn’t just struck by his insights; I was stricken by them. I immediately bought all three of the books he had edited. For days, I sat in a windowless room, reading feverishly, red pen in hand, scribbling notes, underlining entire paragraphs, peppering the margins with arrows and exclamation points.

In 2001, a year before Danny won the Nobel, I wrote a long profile of him .

“The most important question to ask before making a decision,” he told me, “is ‘What is the base rate?’”

He meant you should begin every major decision by figuring out the objective odds of success, given the historical range of outcomes in similar situations.

If you’re thinking of starting a new business, your gut might tell you there’s no way you can fail. According to the Bureau of Labor Statistics, however, half of new businesses die within the first five years . That base rate comes from millions of startups, each of which also expected to succeed. You, on the other hand, are a sample of one.

Knowing that the base rate is 50/50 shouldn’t deter you from trying, but it should prevent you from being unrealistically optimistic.

Danny knew base rates weren’t quite everything. He told me that before he proposed to his second wife, Anne Treisman, he said to her: “I’m Jewish, you’re not. I’m neurotic, you’re not. Almost half of all marriages end in divorce. The base rates are against us.”

“Oh, who cares about base rates!” she replied. Their marriage lasted four decades; Treisman died in 2018.

In 1969, Danny was teaching at the Hebrew University in Jerusalem when he asked Tversky, a mathematical psychologist and colleague there, to visit his class.

In his guest lecture, Tversky argued humans aren’t that bad at estimating risks and probabilities.

“I just don’t believe it!” exclaimed Danny, who was studying visual perception. He already believed that just as optical illusions fool the eye, cognitive illusions fool the mind.

The two men continued their debate over lunch—and for many years after . Amos was organized, confident, quantitatively brilliant. Danny was untidy, self-doubting, astoundingly intuitive. Together, they were intellectual lightning in a bottle.

In 1971, to decide whose name would be listed as lead author on the first scientific paper they published together, the two men flipped a coin. Over the next quarter-century, they published more than two dozen papers together.

In 2006, Danny asked me to help him write a book . I auditioned for a few months, coming up with several different proposals for how to structure the project. We finally got started in early 2007.

What eventually emerged was “ Thinking, Fast and Slow ,” published late in 2011: an internationally bestselling memoir that also offered an encyclopaedic explanation of how the human mind works.

Early on, Danny took me to lunch with his wife near the Princeton campus. When he stepped away, I asked Anne, “Do you think Danny is crazy for wanting to do this book with me?”

“No,” she said. “But you might be crazy for wanting to do it with him.”

In the beginning, I wrote the first drafts of chapters that never saw the light of day. Gradually, Danny took over the writing, agonising over every sentence, as I rewrote and edited.

Late in 2007, as we were polishing the chapter called “The Illusion of Validity,” I woke up one night in an icy sweat, pulse racing, gasping for air. My wife rushed me to the emergency room. It turned out I hadn’t had a heart attack; I’d had a panic attack, the only one in my life before or since.

Danny was even more alarmed than I was.

In 2008 I moved on, joining The Wall Street Journal. Neither of us would ever publicly discuss our book divorce; Danny finished the final third of the book without me.

“Collaborations don’t always end well,” he’d warned me on our first day of work together, “so I want to make sure you will always think of me as a mensch,” a good person.

And so I do—the most complicated mensch I’ve ever known.

Working on the book exposed me to three of Danny’s qualities I hadn’t previously encountered in their full intensity. Only years later did I realise that I’ve internalised them as a journalist and an investor. Or so I hope.

First, Danny saw everything through a child’s eyes or, as some people call it, “beginner’s mind.” No one else I’ve ever known has so often asked: Why? Instead of assuming the status quo is valid, Danny always started by wondering whether it made any sense.

He was also relentlessly self-critical. I once showed him a letter I’d gotten from a reader telling me—correctly but rudely—that I was wrong about something. “Do you have any idea how lucky you are to have thousands of people who can tell you you’re wrong?” Danny said.

Finally, Danny could rework what we had already done as if it had never existed. Most people hate changing their mind; he liked nothing better, when the evidence justified it. “I have no sunk costs,” he would say.

One of his favourite words, while working on the book, was “miserable.” He used it to describe whatever we had just written; the process of writing a book; and, above all, himself.

Danny’s misery was largely rooted in the decades he and Amos had spent exploring the failings of the human mind by picking apart their own errors of thought and judgment.

Taking the outside view on everything else had given Danny the outside view on himself. He embodied the ultimate form of self-knowledge: to distrust yourself above all.

He knew full well how smart he was, but he also knew how foolish he could be. Noticing that he intuitively stereotyped a bespectacled child as “the young professor,” Danny realised people extrapolate the future from almost no data at all. After buying an expensive apartment, he laughed at knowing that he would also overpay to furnish it.

Born in 1934 in what today is Tel Aviv, Israel, while his mother was visiting there, Danny was raised in France. He spent much of his childhood hiding from the Nazis in barns and chicken coops in the French countryside.

He insisted that didn’t explain much about him; after all, not every survivor of the Holocaust had become a self-critical psychologist fascinated by financial behaviour.

Instead, he credited his success to hard work—but even more to luck, especially meeting Tversky.

Danny also insisted that studying the pitfalls and paradoxes of the human mind didn’t make him any better at problem-solving than anybody else: “I’m just better at recognising my mistakes after I make them.”

For all his knowledge of how foolish investors can be, Danny didn’t try to outsmart the market. “I don’t try to be clever at all,” he told me. Most of his money was in index funds. “The idea that I could see what no one else can is an illusion,” he said.

“All of us would be better investors,” he often said, “if we just made fewer decisions.”

The Magnificent Seven trade is beginning to fizzle—and yet, the stock market is still heading higher.

The S&P 500 climbed 10% in the first quarter, its best start to a year since 2019 , even though two of its biggest constituents suffered double-digit declines. Apple shares fell 11% in the first three months of the year, while Tesla dropped almost 30%. Alphabet shares sputtered for much of the period before making a run in the past three weeks and ending up 8%.

The other four big tech stocks in the group known as the Magnificent Seven— Nvidia , Meta Platforms , Microsoft , Amazon.com —continued their meteoric run and outpaced the broader market. Some market strategists have dubbed them the new Fab Four.

Some investors say it is a bullish signal that the market is still rallying without the likes of Apple and Tesla because it means other groups are taking part . All of the S&P 500’s sectors, except real estate, logged gains in the first quarter. Small caps, industrial and financial-services stocks are among those that jumped, fueling bets that the broader market might have more room to run.

Much of the enthusiasm is tied to hopes that the economy has escaped a deep recession and that the Federal Reserve will soon pivot to cutting interest rates , even if not at the pace some investors had previously hoped. A frenzy over the future of artificial intelligence has added to the zeal.

“If you’d have told me eight weeks ago that Apple and Tesla would be down as much as they are, oh and by the way, you’re punting when you’re going to do the rate cuts and you’re getting less rate cuts, I would have assumed the market would be down,” said Ryan Detrick , chief market strategist at Carson Group.

To be sure, some investors worry the divergence in the big tech stocks is a sign of exhaustion in the rally and question whether future gains will be harder to achieve from here. The S&P 500’s market value has swelled more than $9 trillion since late October, and the index has set 22 record closes in 2024.

In the coming days, investors trying to gauge the trajectory of the market and economy will parse the release of U.S. manufacturing data Monday and the monthly jobs report Friday.

Nvidia continues to be a stock-market star. The graphics-chip maker has indicated demand for the computing power that underlies AI remains astronomical . Its shares have jumped more than 80% to start the year, after more than tripling in 2023.

By some metrics, Nvidia has displaced Tesla as the most popular stock among individual investors . It is currently the biggest average holding in individual investors’ portfolios, at about 9%, VandaTrack data show.

Meta shares, meanwhile, have soared partly thanks to Meta’s investments in artificial intelligence that have made targeted ads smarter. The social-media company recently said it would pay its first shareholder dividend. Microsoft stole the crown of biggest U.S. company from Apple earlier this year, with a valuation that topped $3 trillion, and Amazon has sharply improved its profitability.

Despite their recent gains, some of the stocks look less pricey than they did last year. Nvidia is trading at 35 times its projected earnings over the next 12 months, below its peak of 62 in May of last year. Amazon’s multiple is 40, down from 2023’s high of 62. The S&P 500 is trading at 21 times future earnings, slightly up from last year’s highs of 19.

The Fab Four are responsible for nearly half of the S&P 500’s first-quarter advance, according to Howard Silverblatt , senior index analyst at S&P Dow Jones Indices.

Joseph Ferrara , investment strategist at Gateway Investment Advisers, said he expects investors to rotate out of big tech stocks and funnel into other sectors as the year progresses. That is largely because the earnings of the other 493 companies in the index are expected to outperform those of the Magnificent Seven by the fourth quarter.

“The fact that the market is still holding these levels and trading up without that full force of the Magnificent Seven is actually a really positive thing,” he said.

Jonathan Golub , a strategist at UBS, said one reason Magnificent Seven’s earnings dominance could end is because it will be hard to top the explosive growth they posted at the end of last year. Those results looked like blockbuster beats when compared with 2022’s weaker numbers, he said in a recent research note.

Last year, any hint of weakness in the Magnificent Seven would have sent the broader market tumbling. In fact, for much of the year, those seven stocks were responsible for all of the S&P 500’s advance.

This year is a different story. Tesla is struggling on numerous fronts . The electric-vehicle maker is facing pressure from Chinese competitors, which have rapidly expanded their presence around the globe in recent years. It has also warned of notably slower growth in 2024, and its profit margins have taken a hit.

Apple’s woes have been mounting, too . The Justice Department recently sued the company, accusing it of monopolistic behaviour. European authorities are cracking down on its app store. Plus, it is facing another weak iPhone demand cycle, and investors are worried that Apple is behind in the current wave of excitement around AI.

Bespoke Investment Group data show Apple shares underperformed the S&P 500 over the 200 days through Tuesday by the widest margin since October 2013.

SYDNEY—Australia’s monthly inflation indicator came in below expectations in February, signalling that price pressures would likely continue to retreat over coming months.

The monthly consumer-price index indicator rose 3.4% in the 12 months to February, according to the latest data from the Australian Bureau of Statistics. Economists had expected a rise in February of 3.5% on year.

Some economists had expected the monthly CPI update to show a bigger rise, fuelled by services inflation which remains an area of concern for the Reserve Bank of Australia.

The better-than-expected inflation outcome will also help offset some of the uncertainty about the outlook for interest rates that arose in financial markets following news last week of a sharp drop in unemployment in February.

The most significant contributors to the February annual increase were housing costs, which climbed 4.6% on year, while food and nonalcoholic beverages rose 3.6% in the same period.

Alcohol and tobacco prices were up 6.1% and insurance and financial services rose 8.4%, the ABS said Wednesday.

Excluding volatile items from the data, the annual CPI rise in February was 3.9%, down from 4.1% in January.

Annual inflation excluding volatile items has continued to slow over the last 14 months from a high of 7.2% in December 2022, the ABS said.

Rents increased 7.6% for the year to February, up from 7.4% in January, reflecting a tight rental market and low vacancy rates across the country.

New dwelling prices rose 4.9% over the year with builders passing through higher costs for labor and materials. Annual new dwelling price increases have been around the 5% mark the past six months, the data showed.

The 3.6% rise in food prices in the 12 months to February was down from the 4.4% in January. It was the lowest annual growth since January 2022.

Insurance costs jumped 16.5% over the past 12 months to February, with rises in premiums across all insurance types due to higher reinsurance, natural disaster and claim costs, the ABS said.

The ESG brand probably has its best days behind it.

Following a three-year craze for investment products focused on environmental, social and corporate-governance concerns, the percentage of newly created funds in the U.S. and Europe with ESG in their name has fallen from a peak of 8.3% to just 3.3%, according to an analysis of quarterly data by Morningstar Direct.

Likewise, online searches for “ESG investing” have plummeted back to mid-2019 levels, according to Google Trends. Mentions of the term in company analyst calls have dropped 59% from their quarterly peak in 2022, FactSet data suggest.

One explanation is the collapse of the clean-energy stocks most readily associated with the ESG movement. Flagging growth in electric-vehicle sales has hit sector behemoth Tesla . The S&P Global Clean Energy index, which lists solar-panel maker First Solar and Danish wind-turbine giant Vestas among its top constituents, has lost 31% since the start of 2023 as renewable-energy projects have been shelved. That compares with returns of 27% for global stocks.

The rise of ESG investing between 2019 and 2022 coincided with a surge in clean-tech valuations, and now the reverse is happening. Investors have pulled $2.2 billion from funds dedicated to decarbonisation since the start of the year, according to EPFR, and the outflows are getting larger every week.

There is a risk that ESG was an investment fad rather than a financial revolution extending across all industries.

The term was the product of an uneasy three-way alliance. On one side were ethically driven investors, who are particularly widespread in Scandinavia and include pension funds, universities and religious organisations united in wanting to shun contentious firms. On another were institutions such as the United Nations that aimed to channel money to industries that benefit society. Finally, there were investors who wanted to profit from the green revolution.

Asset managers jumped at the chance to cater to all three simultaneously. ESG allowed them to differentiate their products, revitalise the case for active management and, at a time of declining fees, charge more for stock screens that often lead to only small changes in allocations . Among U.S. equity funds, ESG strategies have an asset-weighted average fee of 0.52%, compared with 0.33% overall, Morningstar Direct data shows.

But the confusion of motivations made for contradictions and a lot of doublespeak. Neither ethical objectives nor bets on decarbonisation square logically with fund managers’ claims that ESG is a broad path to higher, safer returns.

Yes, an ESG focus can help active managers account for risks such as a regulatory backlash or governance blow up, which in some cases might be highlighted by new company disclosures. This month the European Union cleared the way toward requiring firms to better report and address sustainability impacts.

However, the assumption that integrating ESG criteria into their screening will lead to better stock picking seems flawed . The very popularity of ESG makes it unlikely that the market is under appreciating the risks. The rush of money into firms like Vestas, whose stock hit a price-to-earnings ratio of 534 in 2022, illustrates the risk that shares with high sustainability scores can get too expensive, leading to lower returns.

Ethical investors might be fine with this, but that just shifts the focus to what counts as ethical. Tellingly, interest in ESG has dropped more in the U.S., where the politicisation of EVs and culture wars surrounding Bud Light beer show how easily corporations can become ideological battlegrounds.

ESG ratings aren’t much help in navigating these issues. Different providers give wildly different scores to the same companies, even within the specific “E,” “S” and “G” factors, according to a February paper by the Leibniz Institute SAFE. Researchers also found that environmental concerns tend to explain most of the overall score.

This is another hint that the ultimate driver of the pandemic-era ESG craze might have been a hunger for thematic investment. It has since found better sources of sustenance, as demonstrated by the breakneck growth of firms such as Global X, which is delivering increasingly granular offerings such as tracker funds for electric batteries, cloud computing and ageing populations.

Buyers of these products can be fickle and jump to the next theme—often too quickly for their own good, a Morningstar analysis showed last November. It is possible that the overly generic ESG brand will never recover its appeal, with the different parts of it eventually rebranded to suit their specific client bases. BlackRock , the world’s largest asset manager, has already dropped it and is now emphasising transition themes over ethical stewardship of companies.

Sustainable investing isn’t going anywhere. But a broad tent covering too many interests serves none of them well.