Need for caution until global inflation starts declining in coming months

The last four years have seen a series of adverse shocks driving the great inflation scare of the post-pandemic era.
After collapsing at the beginning of the pandemic (in early 2020), global inflation started to pick up later in the year as demand bounced back, supply bottlenecks tightened, and oil prices rebounded.
Inflation rose further following the Russian invasion of Ukraine as oil and food prices jumped and renewed supply disruptions emerged.
Since July 2022, however, global inflation has been declining steadily, according to the World Bank.
Professional forecasts, financial market-based inflation expectations, consumer surveys, and model-based estimates all point in the same direction: in the coming months, global inflation has nowhere to go, but down.
Messages from the major central banks last week suggest divergent answers, point out economists Jongrim Ha, Ayhan Kose and Franziska Ohnsorge.
The United States Federal Reserve signalled a possible shift in its policy stance, aligning its interest-rate trajectory closer to market expectations. But the European Central Bank and the Bank of England stuck to their earlier positions, noting that a pivot in their policy stance would be possible only if credible evidence of a sustained decline in inflation emerges.
There are reasons for optimism, the World Bank says. Many factors should push global inflation down further in the coming months. But caution will remain in order until that happens.
A few risks persist that could delay the decline in inflation or reignite price pressures.
All fundamental drivers of inflation suggest that global inflation should decline in the coming months: global demand is easing, supply disruptions are fading, and commodity prices are moderating while monetary policies remain restrictive.
Inflation is highly synchronised across countries, implying that these factors will likely drive down inflation around the world.
Global demand is expected to moderate next year amid tight financial conditions, weak global trade, and limited fiscal support.
Easing global supply pressures are also expected to contribute to the fall in worldwide inflation. These pressures have recently receded to historic lows because of the broad-based weakness in goods trade and the fading of pandemic-era supply disruptions.
After dropping 17% this year, oil prices are expected to continue to fall in 2024 as subdued global growth reduces demand pressures. Oil prices play a critical role in driving global headline inflation, as post-pandemic developments have clearly shown.
Monetary policy will remain restrictive in major economies to ensure inflation returns to central bank targets. Despite the recent decline in inflation, all three major central banks have reiterated their intention to maintain high policy interest rates until they see convincing evidence of disappearing price pressures, although the United States Federal Reserve did signal the possibility of rate cuts in 2024.
The implication is that even if central banks start cutting policy rates, they will keep them high enough to push down price pressures. The lagged and ongoing effects of elevated real interest rates are set to keep global activity weak, thereby further moderating inflationary forces in the coming months.
Yet, there are at least two key reasons to be cautious about the future pace of disinflation: the potential for an inflationary shock stemming from geopolitical tensions as well as continuing pressures that have kept core inflation high.