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Global inflation spike seen posing near-term risks to economy

Central banks need to set out clear strategies for coping with inflation risks as the world economy experiences faster-than-expected cost increases amid an uneven recovery from the pandemic, the OECD said.
Image: Bloomberg

Global central banks need to set out clear strategies for coping with inflation risks as the world economy experiences faster-than-expected cost increases amid an uneven recovery from the pandemic, the OECD said.

While new restrictions to contain the spread of the delta variant are weighing on activity in some regions, supply-chain difficulties and surging commodities prompted the Paris-based organisation on Tuesday to raise its forecast for consumer-price gains this year and next in every Group of Seven country aside from Japan.

“Near-term inflation risks are on the upside, particularly if pent-up demand by consumers is stronger than anticipated, or if supply shortages take a long time to overcome,” the OECD said in a report. “Accommodative monetary policy should be maintained, but clear guidance is needed about the horizon and extent to which any inflation overshooting will be tolerated.”

The revised outlook by the 38-member club illustrates the shifting context for global central banks in a week when at least 15 of them are taking monetary decisions with consumer prices noticeably spiking. Inflation risks are one factor in why the Federal Reserve on Wednesday may move closer to winding down pandemic stimulus.

In the OECD’s forecasts, it now expects inflation in the Group of 20 bloc at 3.7% in 2021 and 3.9% in 2022. While price pressures will gradually soften in the US, the organisation’s economists reckon the rate will stay above 3% through next year.

“Inflation is expected to settle at a level above the average rates seen prior to the pandemic,” the OECD said. “This is welcome after many years of below-target inflation outcomes, but it also points to potential risks.”

Anchored expectations

The outlook stops short of raising the alarm, cautioning — in tune with the views of many central banks — that the current bout of increases should prove temporary.

“Supply pressures should fade gradually, wage growth remains moderate and inflation expectations are still anchored,” the OECD said. Still, “a longer period of higher inflation from persisting supply shortages could shift expectations further.”

With the combination of stronger inflation and uneven growth, the world has lost some growth momentum, according to the OECD. That casts doubt over what kind of economy will emerge from almost two years of severe disruption during a global health crisis. The OECD trimmed its global growth forecast for 2021 to 5.7% from 5.8%.

While central banks and governments have said the recovery is on track, the OECD cautioned that slow vaccination or the emergence of new variants still pose risks. Even if there were better news on the virus front, that too could be problematic.

“Sizable uncertainty remains,” it said. “Faster progress in vaccine deployment, or a sharper rundown of household savings would enhance demand and lower unemployment but also potentially push up near-term inflationary pressures.”

© 2021 Bloomberg

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