Inflation: what is the outlook?

Russia’s invasion of Ukraine has halted the recovery from the Covid 19 pandemic, and is now impacting economic growth by weighing heavily on commodity, energy and food prices “pushing up inflation to levels not seen for decades in the G7 and beyond.”

Against this background, what is the outlook for inflation? John Lorié, Atradius’ Chief Economist comments.

The G7 expressed concern about the burden of energy price increases and energy security, which can have severe consequences for businesses and individuals alike.  The G7 have stated that “In coordination with the IEA, we will explore additional measures to reduce price surges and prevent further impacts on our economies and societies, in the G7 and globally” with the goal to reduce dependency on Russia and support stability in global energy markets.

John Lorié adds that “energy security comes to the forefront, especially due to the geopolitical nature of developments.  The big question is how the EU’s oil ban on Russia will work out, with the need to replace the energy from other sources, also compounded by Russian counter-measures”

The G7 have also affirmed that – with pressure on energy security – they will not compromise their climate and biodiversity goals including the energy transition nor commitments to phasing out or banning the import of Russian coal and oil.

On the topic of whether the current energy security issues could jeopardise the transition to clean energy, John Lorié states that; “in the short term I expect that more fossil fuels will be used, however high energy prices will result in more efficient use of energy and ultimately the desire to be independent from Russian oil and gas will have the effect of accelerating the energy transition”

The high inflation squeezes real incomes of households around the world, and increases pressure on central banks to tighten more aggressively in the short term. We forecast global GDP to slow to 3.1% in 2022, as tighter monetary conditions weigh on activity. This, together with an aggravation of the international supply chains bottlenecks triggered by the war in Ukraine and the Chinese zero-Covid policy will eat into world trade growth, which we expect to continue losing steam, decelerating to around 4% in 2022.