The road back to 2% inflation
Introduction
• Inflation may be more ‘sticky’ near term
• But inflation could fall more quickly medium term
• Policy strategy: balancing these forces
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Core inflation gives a steer on persistent inflation
1. Headline and core inflation
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(annual) 2008 2011 2014 2017 2020 2023 0 1 2 3 4 5 6 7 % Sectoral factor model Headline CPI
Core, non-tradables inflation broadly move together
2.
Inflation
subgroups
versus core inflation
(annual,deviationfromaveragesince2000)
(sectoral factor model)
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2000 2004 2008 2012 2016 2020 -4 -2 0 2 4 6 8 % Core inflation
Tradables Non-tradables
3. Inflation subgroups versus core inflation
(annual,deviationfromaveragesince2000)
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persists
Tradables inflation down, non-tradables
Non tradables inflation has broadened
4. Contributions to non-tradables inflation by category (annual)
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Supply shocks a more important influence recently
5. Decomposition of headline retail trade deflator (annual)
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Labour market tightness key to wage inflation
6. Decomposing annual LCI wage inflation during the pandemic era
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Labour market tightness, supply shortages key to CPI inflation
7. Decomposing annual CPI inflation during the pandemic era
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Labour market tightness a larger factor here
8. Factors influencing inflation across countries over the pandemic era
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Effect of capacity pressure on inflation stronger than pre-COVID
9. Relationship between inflation and capacity pressure
Phillips Curve Slope
Start of COVID pandemic period
Slope measure
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2009 2011 2013 2015 2017 2019 2021 2023 0.00 0.05 0.10 0.15 0.20
Drops in inflation expectations will help embed lower inflation persistence
10. Inflation expectations and headline
CPI
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Non tradables inflation down via monetary-policy sensitive prices to date
11. Non tradables inflation and monetary policy sensitivity
(4quartermovingaverage)
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2008 2011 2014 2017 2020 2023 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Quarterly % Faster response Medium response Slower response
Slowing inflation needs to become more broadbased
12. Distribution of CPI price changes (annual)
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In conclusion
• Non tradables inflation key to medium term inflation persistence
• Spare capacity, lower inflation/pricing expectations needed
• This process could be faster or slower than expected
• Restrictive policy for confidence we return to target in a reasonable timeframe
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Thank you.
