Global Inflation Tracker Q4 2022: Inflation Forecast to Stabilise in 2023, Although Key Risks Remain

Global inflationary pressures continue to ease in Q4 2022. Under the baseline scenario, global inflation is forecast to reach 8.9% in 2022 and then fall to 6.2% in 2023. Slower economic growth and consequently falling B2B demand for manufactured goods, stabilisation of commodity prices and improvements in global supply chains are helping to cap inflation growth.

Additional supply chain disruptions, potential energy price shocks and tight labour markets remain among the key risks, and could accelerate price growth in 2023. In addition, emerging countries are highly vulnerable to the appreciation of the US dollar, which can damage the purchasing power of importers and increase borrowing costs in the external markets.

High inflation and tighter fiscal policies to erode consumer spending power

Despite easing price pressures, inflation remains at a high level and continues to erode consumer purchasing power. Global consumer expenditure is forecast to expand by 1.9% in real terms in 2022, and see slower growth of 1.1% in real terms in 2023, as price increases outweigh consumer income gains.

In addition, changes in monetary and fiscal policies are likely to cause further headwinds for consumers in 2023. Higher interest rates will result in greater debt costs and leave consumers with fewer financial resources to spend on other categories. Fiscal measures implemented by governments, which helped to cap some of the inflationary effects for consumers and support purchasing power, especially of lower-income families, are also expected to come under scrutiny in 2023, as countries will face higher borrowing costs.

Weaker consumer income growth is also reflected in the retail sales data which showed a subdued performance in Q3 2022. Although inflationary pressures are expected to ease in 2023, significant economic uncertainty is predicted to continue limiting sales of big-ticket items. Rising interest rates will also limit consumer willingness to borrow and contribute to the slower retail sales growth.

Inflationary pressures abate in 2023 amid economic slowdown and high interest rates

Inflation in the largest economies is peaking as slower economic growth and consequently moderating demand help to cap price growth. Inflation forecasts for the US and emerging economies are revised marginally downwards as easing price pressures of manufactured goods and commodities help to cap the inflation. However, inflation forecasts in the eurozone have increased as energy prices continue to add to inflationary pressures in the European countries heavily dependent on energy imports.

• Inflation in the US is predicted to reach 8.0% in 2022 and ease to 3.8% in 2023. The inflation rate has been levelling off, following the easing of price pressures for various goods. However, a consistently higher price level and ongoing increases on the services side, especially housing, will continue to place pressure on consumer purchasing power. The US Federal Reserve is expected to continue tightening of the monetary policy to cool down inflation, with interest rates expected to reach 4-5% in the first half of 2023.
• Inflation in China is forecast to reach 2.3% in 2022 and 2.5% in 2023. Although price pressures have increased, inflation in China remains low in comparison to other large economies. Stabilisation of commodities and energy prices, recovering supply chains and weaker domestic consumption growth in China helped to cap the inflation.
• Inflation in the UK is predicted to reach 9.1% in 2022 and moderate to 7.3% in 2023. The inflation rate has reached a 41-year high at the beginning of Q4 2022. Soaring food prices and a higher retail energy price cap are the largest contributors to the inflation surge in the UK. While price pressures are set to soften in 2023 due to shrinking private consumption and weaker economic activity, the planned increase in the energy price cap in April 2023 may lead to a further spike in headline inflation.
• Inflation in India is forecast to reach 6.7% in 2022 and moderate to 5.2%. Increasing household consumption as well as higher import costs amid the weaker rupee have been the major drivers of price growth. Nevertheless, slower growth in food commodity prices helped to limit annual retail inflation growth at the beginning of Q4 2022. To reduce inflationary pressures and prevent a wage-price spiral, the Reserve Bank of India raised the key interest rate in September 2022 and hinted at a stricter monetary policy in the future.
• Inflation risks in the eurozone have increased, largely due to the rising energy prices. Largest eurozone economies with high dependence on energy imports, such as Germany, Italy and Spain, are expected to see sharper price increases with inflation forecast at 8.0%, 7.4% and 8.6%, respectively in 2022. The inflation rate is set to moderate to 6.6% in Germany in 2023, and 3.5% and 3.8% in Italy and Spain, respectively. Inflationary pressures in France have also increased as a result of higher energy prices. However, inflation in France is forecast to ease to 3.5% in 2023. Energy-related price pressures in the eurozone could increase further in 2023 as fiscal measures aiming to cap energy price growth for households will expire by the end of 2022.

Further insights into key economic and inflation trends are available at Global Inflation Tracker: Q4 2022 and Global Economic Forecasts: Q4 2022