The global battle against high inflation seems to be largely successful. After peaking at 9.4 % year-on-year in the third quarter of 2022, headline inflation is projected to fall to 3.4 by the end of next year. This rate is just a bit below the average during the two decades prior to the pandemic. As Kavan Choksi UAE says, in the majority of countries, inflation is currently hovering fairly close to bank targets. This paves the way for monetary easing across major central banks across the world.
Kavan Choksi UAE underlines the disinflationary process and necessary policy changes for the global economy
The global economy has stayed fairly for the most part of the disinflationary process. Growth is projected to hold steady at about 3.2% in 2024 and 2025. The growth in the United States has been quite strong, at 2.8% in 2024. A modest growth rebound is expected in 2025 for advanced European economies. The overall growth outlook is stable in developing economies and emerging markets, at about 4.2% in 2024, with especially continued strong performance from Asia.
The decline in inflation without a global recession is a huge achievement. The surge in inflation and its subsequent decline reflects a distinctive combination of shocks. The global inflation rates have been impacted by broad supply disruptions along with high demand pressures in the wake of the pandemic, followed by a major hike in commodity prices caused by the war in Ukraine. Such shocks have led to an upward shift as well as a steepening of the relationship between activity and inflation. With the easing of supply disruptions and tightening of monetary policy, demand became constrained. This led to normalization in labor markets, and enabled inflation to rapidly decline without a huge slowdown in activity.
A lot of the disinflation process can be attributed to the unwinding of the shocks, along with improvements in the labor market that is commonly linked to increased immigration. As Kavan Choksi UAE points out, monetary policy also had a decisive role to play by keeping inflation expectations anchored and avoiding wage-price spirals. The return of inflation near the targets of central banks paves the way for policy pivot, which can provide much-needed macroeconomic breathing room.
The first pivot on monetary policy is already underway. Since the June of 2024, major central banks in advanced economies have started to cut policy rates and are gradually moving toward a neutral stance. This shall help support activity at a time when the labor markets of many advanced economies are showing signs of cooling. Lower interest rates in major economies shall help in easing the pressure on emerging market economies. After all, their financial conditions are improving and their currencies are likely to strengthen against the US dollar. This would aid in reducing imported inflation and enable these nations to pursue their own disinflation path with greater ease.
The second pivot is on fiscal policy. Fiscal space is considered to be a cornerstone of financial and macroeconomic stability. Subsequent to years of loose fiscal policy in several nations, now is the time to stabilize debt dynamics and rebuild fiscal buffers.
