In a recent article “Is the great inflation scare over? The case for cautious optimism”, the World Bank suggests that planet earth can hope for a respite from the “great inflation scare” driven by a post-covid rebound in demand as supply bottlenecks tightened & oil prices soared.
- Since July 2022, global inflation has been declining steadily, and professional forecasts, financial market-based inflation expectations, consumer surveys, and model-based estimates all point in the same direction: in the coming months, global inflation has nowhere to go but down. Embracing this consensus, financial markets now expect major central banks to cut interest rates in the first half of next year.
- These forecasts are supported by economic improvements in the form of: easing global demand; fading supply disruptions; and moderating commodity prices. As inflation is highly synchronized across countries, these factors will likely drive down inflation around the world.
- However, the World Bank points out that there are at least 2 key reasons to be cautious about the future pace of disinflation: (1) the potential for an inflationary shock stemming from geopolitical tensions; and (2) a continuation of pressures that have kept core inflation high (including possible disruptions to global energy markets).
- Central banks still need to worry about whether they can lower inflation to their target ranges without triggering a sharp downturn in activity & central banks are unlikely to sharply cut interest rates until they are convinced inflation is firmly on a path back to the target ranges. This means monetary policy will continue to be restrictive.