Forecast of 2023 global inflation complicated

Driven by long-term structural factors, the era when the inflation rate in developed economies was below 2 percent has passed. High inflation in these economies may last longer than expected and may even become the norm in the future. With three scenario assumptions of optimism, neutrality and pessimism regarding oil prices in 2023 — which is the greatest uncertainty this year — the average price fluctuation range is estimated to be between $70 and $90 per barrel.

Therefore, the global consumer price index is expected to fall to 4.9 percent by the end of the year and the annual median will be about 6.3 percent for 2023.

Against the backdrop of increasing overseas uncertainties and inflation in major economies, China should continue to prevent the risk of imported inflation and structural inflation in its market.

Special attention should be paid to the pork price cycle in the first half, with a focus on core inflation indicators in the second half. China's monetary policy has remained stable and relatively relaxed over the past two years. There have been no price rises since the country was hit by the pandemic. Core inflation has even shown downward signs. As the contagion control policy is gradually relaxed and previously introduced economy-stabilizing policies have taken effect, consumer demand may recover faster than expected.

Under the influence of the periodic supply-demand mismatch and the low base in 2022, core inflation will return to the historical median of 1.5 percent to 2 percent in China this year. Prices will go up in 2023, but it is still highly possible to achieve the policy goal of controlling inflation at around 3 percent.

Ever since 2022, central banks of about 90 economies have raised interest rates to combat inflation, and half of them have adopted onetime interest rate hikes of more than 75 basis points. The US Federal Reserve has raised interest rates seven times in a row, including four consecutive 75-bp hikes. The country's benchmark rate has been thus spiked by 375 bps in total.

Based on data from the International Monetary Fund, current global inflation seems to have peaked and is showing downward signs. It is mainly due to the decline in the inflation rate of emerging markets. Although the inflation rate of developed economies is still rising, the marginal slope has also flattened significantly.

The tightening monetary policies of overseas central banks have contributed to the overall cooling of inflation in terms of aggregate demand.

But global economic growth will continue to slow this year due to the cumulative effect and time lag of monetary policy. In its latest report, the IMF lowered its growth forecast for 2023 by another 0.2 percentage points to 2.7 percent, indicating that downside risks to the global economy are escalating.

Current international oil and food prices have fallen back to levels seen before the outbreak of the Russia-Ukraine conflict. Supply pressure will bottom out but will still be higher than pre-pandemic levels. Therefore, the normalization of global supply chains will help tame core inflation indicators, such as energy and food, in 2023, but they will still be relatively higher compared to historical data.

In light of the weakening impact of the Russia-Ukraine conflict and expectations of world economic slowdown and even recession, there will be pressure on the outlook for global oil demand this year. Oil prices will thus lack continued upward momentum and will be lower than that in 2022.

If not impacted by any other supply shocks, the global oil price will further head south amid certain fluctuations after the second quarter this year, which is mainly due to the accelerated world economic slowdown and further weakening demand.

As the most important denomination currency for international commodities, the US dollar has passed its temporary high position as the Fed's interest rate hikes are expected to slow. Room for further dialing up of the greenback's value is limited.

Although the US dollar index has fallen from its high level, the US economy's higher resilience than other major economies, such as Europe, will help support the US dollar to a certain extent this year.

Non-greenback currencies may rebound and imported inflationary pressure in these economies will ease. Due to high-flying inflation worldwide last year, the global year-on-year CPI readings will be lower in 2023 due to a high base effect.

Although global inflation is expected to fall in general this year, no sharp declines will be seen due to the strong stickiness derived from uncertainties on the supply side, including contagion resurgences, geopolitical conflicts, energy shortages, deglobalization and labor shortages.

These structural factors are often insensitive to monetary policy. They will continue to affect the stickiness of inflation and grow into a major obstacle in fighting inflation in various countries.

Energy and food prices, the two main factors driving up inflation, still face uncertainties including geopolitical complexities, the reshaping of global energy supply landscape, extreme weather's impact on food production and supply chain stability, as well as rising trade protectionism.

The biggest source of core inflation stickiness is the continuous upward pressure on wages brought about by the mismatch between labor supply and demand.

As the global population ages in many major economies and labor shortages intensify, rising labor costs have become a long-term trend. The structural impact from COVID-19 on the labor market has exceeded expectations. From the perspective of demand, commodity consumption has recovered rapidly after the pandemic eases, while recovery of the service industry lags behind. On the supply side, the substantial fiscal stimulus policies adopted by various countries during the pandemic have reduced many people's willingness to return to the job market, especially among low-income groups. Companies are forced to raise salaries to hire more staff. Coupled with the fact that some older people and those affected by long-term COVID-19 symptoms have permanently withdrawn from the labor market, the recovery of the labor force participation rate is insufficient and the supply gap will be difficult to close over the long run. This, in turn, could further hamper productivity and economic growth, lead to continued rises in labor costs and increase the risk of a wage-inflation spiral.

Whether there will be an inflation spiral depends on inflationary expectations. When inflation continues to rise and breaches a certain level, part of the current inflation is converted into inflationary expectations. Under such circumstances, consumers tend to consume in advance, producers choose to control goods to raise prices, workers will demand higher wages and companies finally pass higher costs on to consumers. Inflation will thus be further pushed up and even lead to a vicious cycle of sorts.

The views don't necessarily reflect those of China Daily.

The writer is chief economist of Zhixin Investment. This article was first published by the think tank China Chief Economist Forum.