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Disinflationary forces are growing more powerful.

The global inflation shock is fading fast. After soaring for the better part of two years, food- and energy-driven headline price measures are coming down more quickly than expected, and core inflation rates (i.e., excluding food and shelter) have tumbled across all major developed economies. With supply chains now largely repaired, Western consumer demand slowing, and the Chinese government pouring stimulus into the manufacturing sector, prices are falling for internationally-traded goods. At the same time, a weakening global demand outlook is intersecting with surging non-OPEC production to put oil benchmarks – critical in driving consumer inflation expectations – under sustained...

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Economies are losing momentum.

Most of the major industrialized economies are showing signs of slowing. Although wages are beginning to outpace inflation in many countries, real household purchasing power remains weaker across most income strata. Excess savings, accumulated during the pandemic, have largely evaporated, and consumers are increasingly tapping sources of credit to sustain spending. The legacy of this year’s sharp rise in borrowing costs is still hitting household and corporate balance sheets, and the flow of money through domestic financial systems is slowing almost everywhere. Money supply measures, annual % change

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Financial conditions are easing.

With the balance of inflation risks swiftly tilting to the downside, markets expect central banks to begin normalizing policy settings in the coming months. Federal Reserve Chair Jerome Powell’s comments during a mid-December post-decision press conference were widely read as implying a willingness to follow canonical policy guidelines—like the Taylor Rule—in moving even before evidence of a downturn arrives. Further, Fed Board Governor Waller’s late-November comments—in which he explicitly said reducing rates would have “nothing to do with trying to save the economy or recession”—have helped ratify market expectations for a fast and furious cutting cadence. The European Central Bank’s...

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Real rates could remain relatively restrictive.

Given the significant progress seen thus far, it would take a meaningful re-acceleration in price growth to motivate additional interest rate hikes in major economies, and a deep downturn could force central banks into delivering the easing currently priced into markets. But because inflation has fallen in line with policy expectations, real interest rates remain elevated, and could ultimately settle well above pre-pandemic levels as the world grapples with changing demographics, geopolitical uncertainties, extraordinary levels of indebtedness, deepening capital scarcity, and higher long-term volatility risks. For households, businesses, and governments, the extremely demand-stimulative borrowing environment that prevailed for more than...

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Regional divergences are growing more likely.

The global adjustment to higher borrowing costs is just beginning, and we think it will likely be more painful for some than others. Across developed economies, households and businesses are struggling under a mountain of debt that will, in many cases, only get heavier and more destabilizing in the year ahead. Private non-financial sector debt service ratios, % Exposures vary across countries, and structural differences complicate cross-national comparisons. But we think the United Kingdom bore the brunt of tightening early and could move through the low point of the economic cycle relatively quickly, given a lower starting point in private...

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