The sharp rise in inflation that forced global central banks to drive up interest rates at the fastest pace in decades looks poised to continue to subside in coming months, though risks persist, World Bank economists said in a blog to be published Monday.
Global demand is expected to moderate amid higher borrowing costs, weak international trade and limited support from fiscal authorities, the economists wrote in the blog, provided to Reuters.
Subdued global growth is expected to continue to put downward pressure on oil prices, which account for 40 percent of the swings in inflation.
Meanwhile, the economists wrote, the global supply pressures that were a big factor in pushing up prices worldwide have recently receded to historic lows and are expected to also contribute to a decline in worldwide inflation.
And while the U.S. Federal Reserve last week signaled that its rate hikes are likely done and a few interest-rate cuts are on tap for next year, monetary policy in the U.S. and elsewhere looks poised to stay much more restrictive than the historical norm as central banks remain focused on bringing down inflation.
READ: With rate hikes likely done, Fed turns to timing of cuts
That’s yet another factor behind the blog authors’ optimism.
“All fundamental drivers of inflation suggest that global inflation should decline in the coming months,” wrote senior economist Jongrim Ha, deputy chief economist M. Ayhan Kose, and Franziska Ohnsorge, chief economist for the South Asia region. “Inflation is highly synchronized across countries, implying that these factors will likely drive down inflation around the world.”
Still, inflation remains above local targets in most of the world, and will remain so in a good 40 percent of inflation-targeting countries next year, forecasters say. Fed policymakers for instance expect inflation to end next year at 2.4 percent; European Central Bank staff expect it to average 2.7 percent. Both central banks aim at 2 percent inflation.
READ: The mouse that roared: New Zealand and the world’s 2% inflation target
More progress will likely require more moderation in demand for services and softer labor markets, the researchers said, and geopolitical tensions could spark a resurgence in oil prices.
“The recent decline in inflation is a welcome sign, but it’s too soon to break out the champagne,” they wrote.
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