The latest surge in global commodity prices has intensified the dilemma facing the world’s major central banks: on the one hand it will push headline inflation (and inflation expectations) even higher, but on the other there’s little monetary policy can do to influence global commodity prices and their recent surge will add to the squeeze on real incomes, economic activity, and core inflation further ahead. We still expect most central banks in advanced economies to press ahead with a gradual tightening of monetary policy, although the likelihood of more aggressive increases in interest rates in the early stages of the cycle has diminished.
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