The inflation outlook: What’s changed?
- Detailed inflation outlooks last year forecast subdued inflation in 2020 and 2022, with a short-lived bounce in 2021. For most economies we stick to that view.
- In the US, the outlook has changed following huge fiscal stimulus, bringing forward the prospect of recovery. The Federal Reserve has also changed its inflation target.
- Faster US growth would close the output gap sooner. This will drive inflation higher, but ‘cyclical’ price pressures constitute just 40% of the inflation basket with healthcare, housing and other price components making up the rest. We forecast PCE core inflation to close 2021 at 1.8%, 2022 at 2.0% and 2023 at 2.3%.
- Changes to the Fed’s reaction function should also lift inflation expectations adding further upside risks. We see inflation rising more quickly than the Fed and expect policy tightening in 2023, ahead of the Fed’s outlook.
- Outside the US, spare capacity, stable energy prices and a softening dollar should subdue inflation. Emerging markets face larger upside risks given greater food price exposure and the risks of sharp currency drops.
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