Services inflation to take centre stage in 2023

Over 2023, we expect global food, energy, and goods inflation to fall sharply. That said, the degree to which services inflation declines will also determine how quickly headline CPI inflation drops. More importantly, services inflation will be crucial in determining the path for policy rates.

What you will learn:

• The recent strength of services inflation will be a source of concern for central banks in 2023, as it is the CPI component that is most closely linked to domestic economic conditions.
• High services inflation will reflect in part wider supply chain bottlenecks and the passthrough of energy and food price increases onto components such as air flights and restaurant meals.
• Nevertheless, supply chain issues and passthrough of higher energy and food prices are unlikely to explain all of the rise. Indeed, high services inflation could signal that the pandemic has permanently hit potential GDP and economies are running hotter than the conventional wisdom.