The following is a freely accessible summary of a published Citi Research report.

In a new Citi Research report, a team of four economists looks at several key questions shaping the global inflation outlook and makes a Deep Dive into inflation dynamics in the U.S., the euro area and emerging-markets economies. The team, consisting of Robert Sockin, Veronica Clark, Giada Giani and Michel Nies, considers the following five questions:

1. How is wage growth influencing broader inflation?
2. What role have supply shocks played in driving inflation?
3. Have inflation expectations been well-anchored in this cycle?
4. Will central banks hit their inflation targets?
5. Are any structural shifts at play that will shape inflation in the years ahead?

Exploring those questions yielded several key conclusions, explored in the report:

• Supply-side factors have been the primary drivers of pressures on good prices. Goods supply chains were disrupted by strains from the pandemic and the war in Ukraine; goods inflation has cooled in lockstep with such stresses easing. Citi’s supply-chain pressure index has been remarkably stable in the last few months and remains near pre-pandemic levels despite geopolitical stresses that have raised shipping costs. That said, the team notes that inflation risks remain due to tensions in the Middle East, and Chinese overcapacity has driven exported disinflationary forces for the rest of the world. Labor-market distortions have also brought supply shocks, though the extent of these shocks has varied by economy, and the authors note that both the U.S. and the euro area have seen labor-market imbalances eased by rapid migration flows that boosted labor supply. A third supply-related development has been weak underlying inflation pressures in China; the authors project that headline CPI inflation in China will gradually rise back to more normal readings, though they acknowledge a “sizable risk” that China could remain a persistent source of global disinflation.
• Services inflation looks more demand-driven, as pressures have stayed elevated in spite of supply-side improvements. The authors note that wages are putting upward pressure on services prices, with the degree varying across economies: In the U.S., wages and services inflation look tightly tied together, but wages have been more of a lagging indicator in the euro area due to the prominence of collective bargaining. High wage growth has also been an important driver of inflation in many emerging markets. The authors note that the U.S. labor market’s loosening over the last year has been enough to imply U.S. wage inflation moderating to 4% to 5%, which is consistent with underlying inflation of around 3%. But they add that U.S. wage data over the last six to nine months has remained at too strong of a pace, suggesting that a further weakening will likely be needed to cool wage inflation further. Turning to the euro area, the team believes ongoing softness in demand and fast-declining non-labor costs will be enough to push services inflation lower even if wages remain stickier than expected.
• Inflation expectations have been remarkably well-anchored, with the authors noting little evidence that the passthrough from actual inflation to those expectations has changed meaningfully compared to the pre-pandemic years. In the authors’ view this development, seen across a wide range of countries, speaks to the credibility of monetary policy and central banks’ commitment to bring inflation back to target. For now, the team writes, there’s reason to believe long-term inflation expectations won’t rise to levels Fed officials would see as “unanchored”—for instance, consumer buying patterns still suggest high prices are deterring spending, rather than encouraging spending ahead of expected further price increases. During this cycle emerging markets’ inflation expectations have also changed in ways that look more similar to developed markets, which the authors believe points to emerging-markets central banks making significant strides in establishing credibility.
• The authors’ base case is that inflation will gradually converge back into the vicinity of central banks’ targets, but they note that the speed of inflation’s fall will vary by economy. They also continue to see two-sided risks, and can’t rule out scenarios in which the global economy returns to the pre-pandemic configuration in which many economies struggled with too little inflation rather than too much of it. A related question is how policymakers would respond to inflation remaining above target. The authors note that a shift in inflation targets—such as the Fed moving to a 3% target—seem unlikely for now. Instead, they see many central bankers operating more flexibly than they have in the past, giving themselves a longer runway to get inflation back to target in coming years. In emerging markets, the authors expect medium-term inflation to settle around targets, with the cycle encouraging those economies’ central banks to maintain and build on their inflation-targeting credentials.
• Finally, the authors study structural factors that will play an important role in global inflation’s trajectory, and which pose longer-term upside and downside risks to the global inflation picture. Such factors include aging demographics, technological improvements and the shifting contours of globalization. Demographics is a particularly interesting factor to consider, as there’s a debate about whether population aging puts upward or downward pressures on prices.

Existing Citi Research clients can follow this link to access the full report.