What goes up must come down? But whilst global inflation is showing signs of having peaked challenges remain meaning any falls could be slower than hoped keeping central banks firmly on their toes throughout 2023.
The evidence is mounting that inflation may have turned the corner. The IMF forecast in its annual health check on the world economy last month, that global inflation would peak at 9.5% in the third quarter of 2022 before falling back to about 4.1% by 2024.
This was supported by a survey of economists by Bloomberg which suggested worldwide inflation peaked at 9.8% year-on-year in the third quarter, and is now heading to 9.5% in the final three months of the year and 5.3% at the end of 2023.
Inflation figures suggest prices have started to fall
Recent data supported this with the inflation rate slowing for a fourth month in a row in the US in October while EuroZone inflation eased in November from a record high in October.
There are also signs that factory-gate prices and inflation expectations amongst companies are waning while another leading indicator, The World Container Index which tracks shipping costs, is now 70% lower than its peak in September 2021.
Supply chains complicated by the pandemic and Russia’s war in Ukraine are also easing, and food and fuel costs have started to retreat as well.
Lastly, and by now means least, are the lagging effects of higher interest rates imposed by central banks as they try and tackle the run-away pricing pressures.
Plenty of obstacles on the road to 2%
However, reaching the peak is only half of the problem and substantial blocks remain before central banks can claim victory in this battle.
“We actually think inflation is going to be harder to bring down to the desirable level of around 2%. Why? Because the drivers of deflation are not only supply [and] demand disruption, but also a changing cost structure that comes from the realisation that, no more, we make economic decisions only on the basis of cost.” Kristalina Georgieva, the IMF’s managing director suggested.
Supply chains still have yet to fully heal, commodity prices could rise anew when, and if, China reopens and workers stung by the high cost of living may continue to force up wages.
“Even with the likelihood that inflation has peaked, inflation will still remain elevated for some time, as supply chain issues persist and there is still plenty of instability with the Ukraine war, which has caused significant swings in energy prices,” said Zach Stein, chief investment officer at Carbon Collective, an investment advisory firm.
Others are more optimistic. Preston Caldwell, head of US economics at Morningstar and he expects prices will fall dramatically in the next two to three years.
He suggested most of the sources of today’s high inflation will abate and even unwind which combined with tightening monetary policy could see US inflation undershoot 2% in 2023 and 2024.
The pace of the fall in inflation matters as it will further dictate the path of interest rates which in turn has implications for economic growth prospects leaving central banks in a quandary.
A slow retreat in inflation would put central banks in a tight spot as they balance dealing with stubborn inflation against the detrimental impact of higher rates on economic growth adding to recessionary pressures.
So whilst inflation looks to have peaked the path downwards is unlikely to be smooth with wage pressures, geo-political instability and fluctuating energy prices just a few of the obstacles to be overcome.