Research Briefing | May 18, 2021

Global Coronavirus Watch: Time for a re-think on inflation?

We think that recent inflation surprises are not evidence of a regime shift in price-setting behaviour. But the path for inflation over the next few months is highly uncertain and depends on several difficult-to-predict factors, ensuring that every development will be intensely scrutinised.

Surging demand for goods along with major supply chain issues are likely to lead to further goods price rises even as spending patterns begin to shift back to pre-crisis norms. It will probably take several more months for freight bottlenecks and semiconductor shortages to be resolved.

But the extent to which, for instance, US durable goods prices have deviated from their longer-run trend does suggest that as we move into 2022 the goods sector may start to be disinflationary.

Another potentially major upward force globally is likely to be higher services inflation. For now, it seems that firms are returning prices to their pre-pandemic trend path, rather than pushing them on to a new higher trajectory. But services firms may view reopening as a timely opportunity to raise prices leading to a larger-than-normal clumping of price hikes.

 

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