World Flash

17 February 2022

A pivot point for the global economy: New urgency in the fight
against inflation
Sara Johnson, Executive Director, Global Economics

Inflation is raging in many parts of the world, with producer and consumer prices surging at the fastest
rates in decades. Hopes for a quick and easy return to pre-pandemic tranquility are fading. The resilience of
global demand and the historic disruption of supply chains have created huge market imbalances that are now
reflected in prices. Massive fiscal and monetary policy stimuli in the early stages of the pandemic have fueled
spending on goods at a time when government restrictions and health concerns have restrained demand for
services. The unpredictable nature of the pandemic has undermined private investment in new capacity.
Thus, while policy stimulus helped make the 2020 global recession the shortest on record, its legacy is a more
difficult path forward. The macroeconomic dimensions of the pandemic were mitigated, but many of the
microeconomic consequences are lasting and substantial.

Inflation is now front and center of monetary policy. Its persistence increases the risk of a rise in long-
term inflation expectations and a wage-price spiral. While inflation expectations in the major countries appear
to be well-anchored around 2%, labor shortages are leading to an acceleration in wage rates. In response to
inflation concerns, major central banks are scaling back asset purchases and advancing timetables for interest-
rate increases. The Bank of England began to raise interest rates in December and we now forecast “lift-offs” by
the US Federal Reserve and Bank of Canada in March 2022, and the European Central Bank in December 2022.

There is a risk that central banks are behind the curve in fighting inflation. Our global GDP-weighted
average of policy interest rates is currently 1.8%, while global consumer price inflation is estimated at 5.5% year
on year (y/y). Thus, real interest rates are highly stimulative. Even with a series of rate hikes and a moderation
in inflation in the months ahead, real policy interest rates will likely remain negative at the end of 2022.

Emerging Europe and Latin America have been out front in raising interest rates, often under the pressure of
currency depreciation. In both regions, a legacy of high inflation has increased the urgency of policy actions
to contain inflation expectations. Brazil’s central bank has been the most aggressive, raising its policy rate to
10.75% in early February from 2.00% a year ago. We expect two more increases, to a high of 12.00% in April.

High inflation and rising interest rates will lead to slower economic growth. After a 3.4% contraction in
2020, world real GDP rebounded an estimated 5.7% in 2021. Global growth will likely slow to 4.1% in 2022 and
3.4% in 2023 as fiscal and monetary policies tighten. The 2022 forecast was revised down 0.1 percentage point,
reflecting weaker performances in North America, Japan, and Russia. Our forecast assumes that the COVID-19
pandemic will recede in significance as vaccination rates rise and effective treatments become more widely
available, allowing economies to remain open. Consumers will drive near-term economic growth. Although
employment continues to recover, high inflation is restraining real income growth. Real consumer spending
growth is apt to slow from 5.9% in 2021 to 3.9% in 2022 and 3.3% in 2023. Although financing costs will rise,
business investment will gain momentum as the pandemic subsides. After a 2.9% drop in 2020 and a 6.1%
rebound in 2021, global real fixed investment should increase 4.8% in 2021 and 4.4% in 2022.

Contacts
Sara Johnson, Executive Director, Global Economics ∙ sara.johnson@ihsmarkit.com, +1 781 301 9115
Confidential. © 2022 IHS Markit®. All rights reserved.
IHS Markit | World Flash

Global price inflation will ease from current highs. Industrial commodity prices have rebounded in early
2022 in response to continuing supply shortages, transportation bottlenecks, and the threat of a Russian
military invasion of Ukraine. The IHS Markit Materials Price Index advanced 12% in the first six weeks 2022,
coming within 3% of its May 2021 high. We expect a 20% correction in materials prices over the course of 2022
in response to rising interest rates; softening demand growth; the slowdown in mainland China’s property
market; and improving supply conditions for metals, energy, and other key commodities.

Labor shortages have contributed to the rise in inflation. In the United States, labor force participation remains
below pre-pandemic levels and job vacancy rates have risen to record highs. Across Europe, COVID-19 has
disrupted migrant labor flows. Meanwhile, the shift in consumer spending from services to goods has created
skills and location mismatches. Some of these shortages should resolve as the pandemic subsides.

Global consumer price inflation picked up from 2.2% in 2020 to 3.9% in 2021 and will likely reach a 14-year high
of 4.6% in 2022. Inflation in goods prices is likely nearing its cyclical peak and should ease as agricultural and
industrial commodity prices retreat. The outlook for inflation in services prices will depend on labor supply
and productivity growth. Overall, global consumer price inflation should ease to 2.8% in 2023, with inflation in
North America and Western Europe settling to about 2.0%.

The US economy is near full employment. The US unemployment rate stood at 4.0% in January and should
reach a low of 3.4% in the third quarter of 2022. With output near potential, real GDP growth will likely slow
from 5.7% in 2021 to 3.7% in 2022 and 2.7% in 2023. Healthy household balance sheets, supportive financial
conditions, and employment gains will sustain the expansion. With headline inflation (measured by the
Consumer Price Index) reaching 7.5% y/y in January, the Federal Reserve will likely increase its policy rate four
times this year, starting in March.

Higher eurozone inflation will bring earlier monetary tightening. Eurozone consumer price inflation
reached a record 5.1% y/y, exceeding expectations and prompting an upward revision in the forecast. We now
expect the European Central Bank (ECB) to cease net asset purchases by the end of the third quarter and
raise its Deposit Facility Rate from -0.50% to -0.25% in December. The ECB will take a gradual approach to
tightening, given that recovery from the COVID-19 recession is less advanced than in the United States. Real
GDP growth should ease from 5.3% in 2021 to 3.7% this year and 2.3% in 2023.

Mainland China’s economic slowdown leads to policy easing. Real GDP growth slowed to 4.0% y/y in
the fourth quarter of 2021 as the government’s deleveraging campaign led to contractions in real estate and
construction activity. COVID-19 containment measures constrained economic activity in January. To support
growth, the government is easing monetary policy and accelerating infrastructure investment. Consumer
price inflation remains tame—just 0.9% y/y in January. Mainland China’s real GDP growth will likely slow from
8.1% in 2021 to 5.3% in 2022 and 5.2% in 2023.

Bottom line: The global economic expansion will continue at a moderating pace in 2022 and 2023. With supply
disruptions continuing, inflation continues to exceed expectations, prompting central banks to raise interest
rates sooner. As demand growth cools and supply chain problems are gradually resolved, inflation will subside.

Confidential. © 2022 IHS Markit®. All rights reserved. 2 17 February 2022

 A quick look at the numbers
2018 2019 2020 2021 2022 2023 2024 2025 2026
Real GDP growth (percent change)
World 3.3 2.7 -3.4 5.7 4.1 3.4 3.1 3.0 3.0
United States 2.9 2.3 -3.4 5.7 3.7 2.7 2.6 2.5 2.5
Eurozone 1.8 1.6 -6.4 5.3 3.7 2.3 1.6 1.4 1.4
Japan 0.6 -0.2 -4.5 1.7 2.9 1.7 1.0 0.8 0.8
Mainland China 6.7 6.0 2.3 8.1 5.3 5.2 5.1 5.0 4.9
Consumer price index (percent change)
World 2.9 2.6 2.2 3.9 4.6 2.8 2.7 2.6 2.6
United States 2.4 1.8 1.2 4.7 4.5 1.9 2.1 2.1 2.2
Eurozone 1.8 1.2 0.3 2.6 4.0 2.0 2.2 1.9 1.9
Japan 1.0 0.5 0.0 -0.2 1.0 1.0 1.2 1.2 1.3
Mainland China 2.1 2.9 2.5 0.9 1.9 2.4 2.4 2.3 2.3
Exchange rates (year end)
Dollar/euro 1.15 1.12 1.23 1.13 1.13 1.16 1.21 1.24 1.25
Yen/dollar 110.8 109.1 103.5 115.0 117.2 117.4 116.1 113.8 110.2
Source: IHS Markit © 2022 IHS Markit

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