|Global inflation was at a multi-decade high last year. Inflation will still average among the highest rates in recent decades in 2023, fueled by elevated energy prices, China’s economic rebound supporting commodity markets more generally, and labor shortages spurring wage increases. However, interest rate hikes and easing supply concerns—thanks to improved shipping and semiconductor availability, and likely minimal Covid-19 disruptions—will provide downward pressure.
The outlook varies wildly by country. Of major economies, the UK is forecast to have the highest inflation rate, as a result of the rise in the energy price guarantee from April and a tight labor market—with the latter likely exacerbated by Brexit. At the other end of the spectrum, our analysts see Japan recording an inflation rate of a little over 2%, due to tame demand-push pressures, an expected recovery in the yen and ingrained low inflation expectations.
In the Euro Area and the U.S., inflation will remain too hot for comfort at two to three times central banks’ targets. In contrast, average inflation in the BRICs (Brazil, Russia, India and China) will be a much more manageable 3%, largely due to muted price pressures in China as slack in the Asian giant’s economy persists.
Further out, global inflation should continue its downward trend. However, our Consensus is that inflation will not return to its 10-year pre-pandemic average until 2027, against a backdrop of fracturing global supply chains, Europe’s push to wean itself off fossil fuels, and an ageing population. The world economy may have passed peak inflation. But sticky price pressures will be with us for several years to come.
Insights from Our Analyst Network
“We also anticipate that China’s reopening will boost global inflation. Supply improvements from China’s reopening should lower US core inflation by around 0.1pp, but this core inflation drag will be mostly offset by a boost from higher aggregate demand, and—according to our commodity strategists’ oil price estimates—the full effect of China reopening could raise US headline inflation by ½pp. We similarly estimate that China’s reopening will moderately boost headline inflation in most other economies.”
On Euro area inflation, analysts at Nomura said:
“Core inflation will likely stay stubbornly high for a few more months. To some extent, producers are still passing recent cost increases on to consumers. However, even excluding the energy component, raw material and producer price pressures are abating. The rebound in the nominal effective exchange rate and the easing of supply chain pressures will also lead to less elevated rates of core inflation with lags of up to nine months. So far, unit labour costs have not accelerated to an extent that would prevent the return to more normal rates of core inflation.”