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S&P Inflation Data Spells Out When We Can Expect Relief

While global price inflation may be peaking, its retreat may prove painfully slow, a new report from S&P Global Market Intelligence said.

Global consumer price inflation picked up to an estimated 7 percent this month from 5.3 percent year on year in December–a pace that will likely be maintained through September, S&P Global Market Intelligence noted.

“Unwinding the cost pressures that have built up over the past two years will take some time,” the report said. “Yet, rising interest rates, slower economic growth and improving supply conditions will bring some price relief.”

After reaching a record high in early March, the IHS Markit Materials Price Index fell 14 percent through mid-May, led by declines in prices of metals, energy, chemicals and lumber. A deceleration in consumer goods prices will follow, although resilience in services demand could delay the easing in services price inflation, S&P Global Market Intelligence forecast.

Global consumer price inflation is projected to rise to 6.7 percent in 2022 from an average of 3.9 percent in 2021 before moderating to 3.7 percent in 2023 and 2.7 percent in 2024, the report projected.

In the United States, high inflation and rising interest rates have dimmed the economic outlook. The Federal Reserve raised its policy rate by 50 basis points at its May meeting and signaled more forcefully its determination to subdue inflation. The federal funds rate will likely rise to a range of 3 percent to 3.25 percent in mid-2023.

In anticipation of further policy tightening, Treasury term yields have risen sharply, as have spreads to corporate bond yields and mortgage rates. The dollar has appreciated while the S&P 500 index of stock prices has fallen 20 percent year to date, the report noted.

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“Although household finances are generally in good shape, high inflation is eroding real incomes and making households more cautious about spending the savings they accumulated during the pandemic,” S&P Global Market Intelligence said. “The boom in housing markets is subsiding and by year’s end, business will start reining in capital spending increases.”

Real gross domestic product (GDP) growth is projected to slow to 2.4 percent in 2022 and 2023 from 5.7 percent in 2021, down from S&P Global Market Intelligence’s April forecast of 3 percent in 2022 and 2.8 percent in 2023. With real GDP growth running below potential, the unemployment rate will rise to 5 percent by 2025 from 3.6 percent in April, S&P Global Market Intelligence predicted.

“Russia’s invasion of Ukraine, a wave of Covid-19 infections and lockdowns in mainland China, relentless inflation, and tightening financial conditions have disrupted production and stifled demand, causing the global economy to stall,” Sara Johnson, executive director for economic research at S&P Global Market Intelligence, said. “Led by services, growth is expected to return at a moderate 2.5 percent annual pace in the final two quarters of 2022, with the lifting of Covid-19 restrictions in most regions.”

“After a 5.8 percent rebound in 2021, global real GDP will likely increase 2.9 percent in 2022 and 3.1 percent in 2023,” Johnson added. “This forecast is revised down by 0.3 percentage point in 2022 and 0.2 percentage point in 2023, largely reflecting weaker growth prospects in mainland China and the United States. While the global economic expansion is expected to continue at a diminished pace, new geopolitical, financial or supply-side shocks could tip the world economy into recession.”

The report also said that soaring energy costs could also push Western Europe into recession. S&P Global Market Intelligence’s May forecast incorporated a mild quarter-on-quarter contraction in Eurozone real GDP in the second quarter and declines in U.K. real GDP over the final three quarters of 2022.

Eurozone retail sales, industrial production, and net foreign trade decreased in March, as the fallout of the Russia-Ukraine war took a heavy toll on consumer and business confidence. On the positive side, the S&P Global PMI surveys showed robust growth in the service sector in April following the removal of pandemic containment measures.

S&P Global Market Intelligence’s forecast has Eurozone real GDP growth slowing to 2.5 percent in 2022 and 1.8 percent in 2023 from 5.4 percent in 2021. The prospect of a further disruption to energy supply, which drives up prices, is a downside risk as the European Union considers broadening the ban on energy imports from Russia to include oil and petroleum products.

Meanwhile, Covid-19 restrictions have dealt a major setback to mainland China’s economy. After 4.8 percent year-over-year growth in real GDP in the first quarter, economic performance turned down significantly in April, with retail sales falling 11.1 percent year over year in April.

The lockdowns, centered in Shanghai, disrupted port activity, causing a slowdown in previously robust export growth. While new cases of Covid-19 appear to be declining and industrial activity is resuming, the government’s dynamic zero-Covid policy will remain in place through 2022, “preventing a return to normalcy and limiting the effectiveness of new fiscal and monetary stimulus measures,” the report said.

It forecast real GDP growth in the region to likely slow to 4.3 percent in 2022 from 8.1 percent in 2021, with real consumer spending growth slackening to 2.2 percent from 5.9 percent in 2021.

“The slowdown in mainland China will have modest spillover effects among its regional trading partners,” S&P Global Market Intelligence said. “Real GDP growth in Asia Pacific excluding China and Japan is expected to ease from 5.4 percent in 2021 to 4.7 percent in 2022 and 4.5 percent in 2023.

In response to sanctions and the withdrawal of foreign investments, Russia’s real GDP is projected to fall 10.2 percent in 2022 and 1.4 percent in 2023 “before beginning a languid recovery,” the report added. After a 46 percent collapse in 2022, Ukraine’s real GDP will likely rebound 30 percent in 2023 and 14 percent in 2024 as reconstruction proceeds, supported by substantial aid from Western allies.