A new report from IHS Markit forecast that as the global economic expansion gains momentum, inflation is likely to heat up, but the pace is likely to be moderate.
“While inflation is clearly a risk, a return to the double-digit inflation rates seen in the mid-1970s and early 1980s is unlikely,” Sara Johnson, executive director of global economics for IHS Markit, said. “Global competition, supply responses and well-anchored long-term inflation expectations will help to limit the magnitude and duration of a price acceleration.”
Sparked by fiscal stimulus and confident consumers, the U.S. economy will reach full employment in 2022 and the unemployment rate will reach a new low of 3.5 percent in mid-2023, triggering accelerations in wages and prices, and consumer price inflation will move above 2 percent in 2024 and reach 2.5 percent in 2026, the IHS Markit forecast said.
The United States will also lead a gradual acceleration in global prices from 2023 to 2026, the outlook projected. As supply conditions improve over the remainder of 2021, IHS expects significant corrections in shipping rates.
In most industries, global capacity looks sufficient to meet projected demand in 2021 and 2022 if operating rates improve. With prices of industrial and agricultural commodities retreating from current levels, global consumer price inflation will ease to 2.4 percent in 2022, according to IHS.
In China, consumer price inflation is projected at 1.5 percent in 2021. Since the recession in early 2020, supply has rebounded faster than demand, according to Johnson and Jonathan Ablett, executive director for global economic modeling at IHS Markit.
In Europe, gaps between potential and actual output remain, restraining inflation. Sluggish recoveries, slack labor markets and subdued inflation expectations will keep core inflation relatively low on the continent, the report noted.
World real gross domestic product (GDP), adjusted for inflation, is projected to advance 5.1 percent in 2021 and 4.3 percent in 2022 before settling to a more sustainable 3.1 percent growth pace in 2023-25, the economists said. The U.S. and China are leading the global expansion, while Europe and Latin America are lagging behind as countries struggle to contain the COVID-19 virus. Yet, even these regions are likely to experience growth spurts in the second half of 2021.
“As COVID-19 vaccines reach more of the population and authorities further ease activity restrictions, consumer spending will accelerate, lifting global output to a new peak by the third quarter of 2021,” Johnson said. “Businesses will gain confidence in the expansion’s durability and move forward with new investments.”