The “transitory” supply-side forces that lifted inflation through much of the post-pandemic period are retreating. With supply chains almost fully healed, global shipping costs have plunged, agricultural price indices are down more than 20 percent from their highs, and in most industrialized countries, grocery costs are softening in month-over-month terms. Energy prices remain elevated relative to historical averages, but are down dramatically from last year. And consumer expectations are coming down in most regions.

On the demand side, a powerful feedback loop remains in play, with aggregate nominal household incomes rising as persistent labour market imbalances put upward pressure on wages, adding to excess savings and positive wealth effects in keeping consumer spending aloft, and in turn, raising incomes even more. Economists and policymakers expect this “sticky” core inflation cycle to continue for many months yet. But even here, there are signs of an easing in price pressures ahead: Measures of underlying inflation are subsiding, breakevens suggest markets are convinced price growth will slow dramatically by the end of the year, and producer price indices – which typically foreshadow changes in core inflation – have been falling in most major economies over the last nine months.

Producer Price Indices, annual % change