Our outlook for the pace of economic policy tightening is broadly unchanged – strong aggregate demand and high inflation is placing pressure on monetary and fiscal policy to “pivot” tighter in advanced economies. Although, the central bank trade-off between controlling inflation and supporting growth is now more complicated.
High inflation has been driven by rising energy and food prices, high pandemic-related demand for goods, and production and transportation bottlenecks in the supply of these goods. We now expect higher average commodity prices in 2022 and for improvements to supply-chain bottlenecks to take longer. This means average inflation in the U.S. and Europe will be higher than we expected in 2022. Nevertheless, we still expect inflation to gradually fall back to around central bank targets in 2023. The risk around this baseline outlook remains tilted towards higher inflation.
Higher average inflation in 2022 means a bigger squeeze on household real incomes and spending and, potentially, weaker confidence. While this will slow growth, it is occurring from a high base of strong employment growth and high savings – we still expect good economic growth rates in 2022/23.
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