When global inflation reared its ugly head at the slowdown of the pandemic, there was a frenzy reaction by central bankers globally. The narrative was that there was no policy coordination between the fiscal and the monetary sides. Both extremes of economic policy were bent on averting a global economic recession and in my view, they did too much. It would have sufficed for the fiscal arm to stay the course of fiscal interventions while central bankers cut rates more reasonably bearing in mind the lagged effect of the supply of money pumped into the global economy due to the intervention glut.
With the ousting of the pandemic, central bankers have had to wrestle with inflation with all arsenals within their disposal. However, it seems it is easier to expand the supply of money than to withdraw it back from circulation. The simple reason is that economic agents are rational and there will always be a multiplier effect of the supply of money on prices. Following the post-pandemic chain of events, monetary economics seem to have collapsed and now dysfunctional as global inflation remains sticky. I mentioned in my annual outlook that target inflation across countries must be redefined upwards. Striving to attain the previous levels set by central bankers may be a wild goose chase.
The crucial question now is that with all the efforts by central bankers; has global inflation really fallen and should central bankers commence a dovish campaign? Data from the IMF shows the following inflation transition since the pandemic – 2020 (3.2%); 2021 (4.7%); 2022 (8.7%) and 2023f (7.0%). The IMF is also optimistic that by the end of 2025, global inflation should hit 3.5%, which is close to the pre-pandemic level. This outlook would support the argument that global inflation is now slowing down in 2023. In the United States, YoY inflation has dropped from a peak of 9.1% in August 2022 to 4.9% in May 2023 and the decline has been very consistent. Inflation in the United Kingdom has also declined from 11.1% in November 2022 to 8.7% in May 2023. South Africa’s inflation has slowed down from 7.8% in August 2022 to 6.8% in May 2023. In France and Germany, inflation is down from 6.1% in August 2022 to 5.1% in May 2023, and from 10.4% in November 2022 to 6.1% in April 2023, respectively. All these data show that inflation in most advanced countries is slowing down and the prolonged rate hike may have started yielding some benefits. Of course, the narrative would be different in developing countries because of their low production and high dependence on imports. So, there is still the imported inflation component for low goods-producing developing economies.
Given the data described above, a few predictions can be made regarding inflation and how central bankers are likely to react to the evolution in the near term. First, central bankers will eventually make a switch to a dovish stance; however, a bunch of them will maintain their insistence to see inflation drop to pre-pandemic level. Depending on how this hurts the real economy and speed of the correction of inflation, central bankers may act either faster in reducing interest rates or continue to justify their hawkish position. Additionally, central bankers in developing countries will be forced to maintain the course of rate hike longer than their counterparts in developed countries because of the conundrums around production.
The risk to the upside for global inflation remains the emergence of another global economic shock, slowdown of production in major goods-producing countries like China and Brazil, new fiscal interventions to augment household and corporate income in individual countries, and a shower of dollar from the sky.
Written by Michael Ogunremi
Data credit – IMF, Investing.com
Picture credit – freeimages.com