Hawkish turn to dampen inflation

While inflation has broadened out and surprised to the upside in 2022, we maintain the view that it will fall sharply in the year ahead. For one thing, we expect commodity prices to fall. Even if we are wrong about this, prices are unlikely to rise enough to prevent base effects from dragging heavily on headline inflation. What’s more, goods shortages and logistical bottlenecks have improved in some places, spending patterns are normalising, and inventories are being rebuilt. We expect these trends to continue, causing goods price pressures to ease. And, compared to our last Inflation Watch, we think that central banks will deliver more policy tightening, which should help inflation to settle around targets in two years’ time. The key upside risk is that tight labour markets and high inflation expectations will generate persistently high pay growth. Equally, though, central banks might hike rates too far and trigger disinflationary recessions.