Beyond inflation: Exploring the roadmap for global economic resurgence

In the US, inflation measured through the consumer price index (CPI) fell to a two-year low of 4.9% year-on-year (y-o-y) in April. In the other major developed economies of UK and Eurozone, even as inflation is still elevated, it has come off from recent peaks.

A similar trend is playing out in key emerging economies. In India, headline CPI inflation fell to an 18-month low of 4.7% y-o-y in April. Among economies in the ASEAN group, Indonesia and Philippines saw inflation dip to multi-month lows in April. ASEAN is short for Association of Southeast Asian Nations.

What adds to comfort is that this decline in inflation is largely broad-based, thus aiding hopes that the downward trend could sustain. And thanks to easing international prices of many heavyweight food items in the CPI basket, food inflation is also cooling off.

Secondly, a significant fall in global crude oil prices from the levels seen last year, has come as a breather. This has translated to softening energy inflation. The upside in the commodity complex including oil prices may remain capped going ahead amid weakening global growth and fading demand. In short, the worst for food and fuel inflation could be behind us.

Finally, the elephant in the room—a relatively sticky core inflation, which accounts for a much larger share of the CPI basket, particularly in developed economies. It is worth noting that precise official definition of core inflation differs across economies and central banks. But broadly, core inflation is calculated after stripping the volatile food and energy components and is a reflection of underlying price pressures in an economy.

There is some good news on this front as well. In the US and India, core inflation fell meaningfully in April.

In the backdrop of aggressive global interest rate hikes and nascent softening in economic momentum, moderation in core inflation is hardly surprising. Further, through most of last year, goods producers have been raising selling prices, which may be curtailed now amid slowdown in global growth.

All said, in this long-standing battle, most global central banks seem to have tamed the inflation beast, to a large extent, with their monetary policy rate tool. Going by the projections of the International Monetary Fund (IMF), a meaningful decline in world inflation is in the offing. World CPI inflation is seen declining from 8.7% y-o-y in 2022 to 7.0% in 2023 and further to 4.9% in 2024. (See chart)

All this put together suggests that the global economy is heading to the disinflationary zone—a scenario of temporary moderation in inflation. Also, with disinflation, comes an increased possibility of a much-awaited pause after a sustained period of global monetary tightening.

But, looking a little ahead, central banks could be gearing up, yet again, for a new battle—the one to support growth.

Global economic momentum is feared to weaken this year, under the burden of aggressive monetary policy tightening.

For instance, the May Eurozone and US flash purchasing managers’ index surveys, published by S&P Global show that business activity in manufacturing sectors in these regions have started showing signs of weakness.

While it remains to be seen how deep the global growth slump can get, a faster recovery may warrant some degree of monetary easing, next year, particularly if global disinflation sustains.