Inflation: how high will it go?

Inflation has been on a relentless upward march in recent months in developed economies, on the back of supply chain tightness, the impact of the war in Ukraine on commodity markets, and recovering economic activity. The analysts that we poll have raised their forecasts in tandem: Consumer price inflation is now expected to average 7.1% in the UK and U.S. this year, and only slightly lower than that in the Euro area.

Inflation will only continue to rise in the near term. Higher food and fuel prices in the wake of the war are still filtering through to the end prices paid by consumers. Plus, the impact of Western sanctions on Russia’s energy output will intensify in the months ahead, while Russia’s ban on gas exports to some EU countries will likely further stoke energy prices. Moreover, China’s Covid-19 surge and lockdowns are causing logistical logjams which will filter through into further supply chain trouble in the short term. That said, the discrepancy among analysts is wide, reflecting the uncertain geopolitical outlook: In the U.S. for instance, 2022 inflation forecasts range from a minimum of 5.7% to a maximum of 12.5%.

Fiscal support measures—which have been rolled out in a host of European countries in recent weeks—should temper the upswing in prices to an extent. And monetary tightening will also play a role in eventually reining in price pressures. That said, aggressive rate hikes will bring their own risks: In the latest CNBC Fed Survey, a majority of financial experts now see a U.S. recession as a result of the Federal Reserve’s expected interest rate path. This leaves monetary authorities between a rock and a hard place—and everyday citizens with a highly uncertain economic panorama for the months ahead.
Insights from Our Analyst Network.

Insights from Our Analyst Network

On the outlook for U.S. inflation, the EIU said:

“We forecast that inflation will remain above 7% in the first half of the year and ease gradually in the second half as Fed tightening slowly takes effect and price rises decelerate, especially when compared with the second half of 2021, when annual inflation averaged 6%. However, for the full year, we forecast that inflation will average 7.2% in 2022 (revised from 6.6%). Despite rate rises and slowing demand (which will also take some heat out of the labour market, where widespread worker shortages have been pushing up wages, exacerbating the upward spiral in prices), we now expect inflation to average 2.8% in 2023.”

On the implications for asset markets, analysts at ING said:

“The times of solid risk sentiment in the face of tightening central banks are over. The end of the goldilocks market makes sense and asset classes have to chose between the inflationary or recessionary scenarios. The curve can price both for a time, by flattening, but we think bonds will eventually benefit from safe-haven demand across the board.”

 

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Oliver Reynolds, Economist

Date: May 6, 2022