Global Macro Research
Inflation

How sticky will inflation be?

Core services inflation is proving sticky amid tight labour markets, strong wage growth, and higher inflation expectations. We think the recessions in developed markets we are forecasting are ultimately necessary to bring underlying inflation to target-consistent rates. We lay out the theory behind sticky inflation, and the key waymarks to watch.

Authors
Senior Research Economist
Paul Diggle
Chief Economist
Luke Bartholomew
Deputy Chief Economist
Felix Feather
Economist

Duration: 1 Min

Date: 06 Jun 2023

Key Takeaways

  • Global headline inflation has started to ease and

    supply chain disruptions have broadly cleared. But

    core services inflation remains stubbornly high in a

    number of countries.

  • The pandemic revealed a steeper part of the Phillips

    Curve, which is why inflation rose so high so quickly.

    But inflation could also decline rapidly without much

    damage to growth if the Phillips curve remains steep.

  • However, the prolonged period of high inflation may be

    altering price-setting behaviour as firms and workers

    try to make up for past inflation. This could give

    inflation a momentum that is harder for central banks

    to tame.

  • Tight labour markets, strong wage growth, and

    inflation expectations still above pre-pandemic norms

    are all contributing to the resilience of underlying core

    services inflation.

  • Indeed, monitoring these waymarks convinces us that

    only an eventual economic downturn can now bring

    underlying inflation back to target-consistent rates.

     

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