Inflation is about to jump, but will it persist?
The key factor driving headline inflation rates over the coming months will be a rise in energy inflation. The increase and future increases in Brent Crude may add 1.5% to average headline inflation to Developed Markets in the next quarter. However energy inflation is set to fall back and supply shortages should ease as spending patterns normalise.
We doubt that the rapid rise in the money supply will generate higher inflation in the near term as we do not expect households or firms to run down savings they have built up during lockdowns. Whilst there will be some inevitable pent up demand for spending, the money may be used to pay down debt as has been the case in the US who are already ahead in unlocking.
Vaccine rollouts and the relaxation of restrictions should pave the way for a rebound in hours worked within the Labour market particularly in those industries hardest hit, but it is likely to take a couple of years before labour markets are tight enough to stoke up wage inflation. Even then we anticipate that core labour costs settling around pre-virus levels by the end of 2022 so not enough to trouble Central Banks.
So we expect a rise generally in core inflation across the board in the short term but then a divergence with inflation persisting in the US and UK whilst dropping away in the Euro-zone and Emerging Markets and Japan. There will be some pick up in China due to the advanced stage of the economic recovery.
Inflation forecasts for 2021 & 2022 are for the US, 2.8% & 1.8% respectively; UK and China 1.5% & 1.5%; Euro-zone 2.1% & 1%.
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An abridged version of Captail Economics weekly Global Inflation Watch written and collated by:
Jennifer McKeown, Head of Global Economics Service
Simon MacAdam, Senior Global Economist
Gabriella Dickens, Global Economist
19th March 2021
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