Inflation is about to jump, but will the rise persist?

Inflation will rise sharply in every major economy in the months ahead, driven by a rebound in energy inflation, tax changes, and supply shortages. On average, CPI inflation in the advanced economies looks set to rise from 1.1% in February to 2.6% in May. But while the increase will probably prove transitory in the euro-zone, we expect a higher rate of core inflation to persist in the US. The US recovery is already relatively advanced, and the economy is set to benefit from another round of fiscal stimulus. The labour market looks tighter than that in the euro-zone and there is firmer evidence of rising input costs being passed on to consumers. What’s more, the Fed has made a more decisive shift towards tolerating higher inflation than the ECB, which has served to boost inflation expectations further.
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Recoveries regaining pace after slow start to the year

Global GDP growth slowed sharply in Q1 as most parts of the world grappled with renewed waves of coronavirus. The US and Korea were among the few exceptions where recoveries accelerated. But with global infection numbers now falling, activity seems to be gaining momentum again. The Global Composite PMI rose to its highest level since April 2006 in May. What’s more, our high frequency COVID Mobility Trackers suggest that activity has risen sharply, particularly in Europe, as restrictions have eased. Other than in particular sectors such as motor vehicle production, there is little evidence so far that recent supply shortages are holding back output. But there are growing signs of inflationary pressure around the world, most notably in the US. Fears of higher inflation should prompt numerous central banks in emerging economies – especially in Central & Eastern Europe – to shift towards tighter monetary policy in the coming quarters. But central banks in major DMs will look through higher inflation this year and next.

11 June 2021

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How concerning is the recent rise in inflation?

A rise in inflation was always likely to happen this year as economies re-opened and energy prices recovered from last year’s sharp falls. But in the US in particular, the increase since the start of the year has exceeded even our relatively strong expectations. While this might primarily reflect transitory factors, we continue to think that the risk of a sustained rise in inflation is bigger in the US than in other developed economies.

10 June 2021

Global Economics Update

G7 tax deal encouraging sign for cooperation among DMs

The direct implications of this weekend’s deal on global corporate taxation struck by G7 finance ministers will be limited. But the deal suggests that wealthy nations have found renewed determination under a Biden presidency to cooperate on global issues, which may pay dividends in other areas in years to come.

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Near-term inflation pressures mount

Near-term inflationary pressures appear to be building. Some of this reflects factors that are likely to be only temporary, such as the “reopening inflation” associated with the easing of virus-related restrictions. We also think the broad-based rally in commodity prices will go into reverse later this year. But there is a risk that shortages of commodities could constrain the production of goods and services, leading to a more broad-based rise in inflation. So far, there is most evidence of a rise in underlying price pressures in the US, which is consistent with our forecast of a prolonged upward shift in core inflation there.

17 May 2021

Global Economic Outlook

Recovery to proceed apace despite rising risks to EMs

A rise in virus cases and some setbacks to vaccination programmes have pushed back the recoveries in some countries somewhat, but we still expect strong global growth of over 6% this year. The US will continue to lead the way thanks to its strong policy stimulus while the euro-zone will lag further behind than most expect. Downside risks are rising among the EMs, relating partly to struggles to get the virus under control in major economies, including India and Brazil. And while China has emerged strongly from the pandemic, growth there will soften as credit is restrained. This mixed outlook has some interesting implications for inflation: we see significant risks of a sustained pick-up in the US but a more modest threat elsewhere.

23 April 2021

Long Run Economic Outlook

COVID legacy will be higher debt, not weaker growth

We do not expect the pandemic to do permanent damage to global economic growth as vaccines allow activity to resume. There will be sustained behavioural changes, but these need not be negative. Note, for example, that technology use has accelerated in many advanced economies, supporting our view that future productivity growth will be stronger than most expect. Another key legacy will be higher public debt, but we expect this to be managed through sustained low interest rates and by central banks tolerating a significant rise in inflation. The increased pushback against globalisation has strengthened our conviction that EM catch-up will slow. Meanwhile, the green energy intensive fiscal stimulus around the world has brought forward the likely timing of peak oil demand, which will weigh on oil prices and see some EMs struggling to diversify.

12 February 2021
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