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Why Economists Think Inflation Will Start Declining In 2023 (And It’s Not Such Good News)

A graph shows price increases in various goods and consumables in the United States

A graph shows price increases in various goods and consumables in the United States

Probably the worst in terms of inflation is over.

At least that is what the consensus of economists and the main economic organizations such as the IMF or the World Bank thinks after most of the world’s countries experienced in this year that we left behind price rises not seen in four decades.

There is no doubt that inflation will continue to hurt the pockets of millions of citizens in 2023, but it will give a general respite with a slow trickle down over the next 12 months.

At the end of that period, the International Monetary Fund expects world inflation to have fallen to 4.7%just under half of its current level.

Of course, experts warn, what is happening in each of the world’s major economies is different.

What is happening in Europe is not the same as in the United States or the rest of the advanced economies or in the emerging countries.

Strike of the transport sector in Panama due to the high cost of food and fuel

Strike of the transport sector in Panama due to the high cost of food and fuel

More pain

But many seem to agree that global GDP growth will continue to slow and inflation has peaked.

However, it will remain at high levels, in a context that many They have renamed it the “new normal”.

“Everything indicates that inflation in 2023 will moderate, although will continue to be higher than before the pandemic“, explains to BBC Mundo Juan Carlos Martínez Lázaro, professor of Economics at IE University.

We will not see an abrupt fall. The price of oil has fallen, but it remains high. The same as raw materials and there are still certain problems in global supply chains,” recalls Martínez Lázaro.

“Therefore we expect that in 2023 the average inflation rates will be lower than those seen in 2022. But of course it will take time and it will not be in 2023 when it will be possible to return to pre-pandemic inflation levels. To reach that scenario It’s still months away.”

In fact, US Federal Reserve officials believe that inflation will take until 2025 to return to the objective of the institution, which is around 2%.

Brazil had one of the highest inflation rates in the world in 2022

Brazil had one of the highest inflation rates in the world in 2022

“Many of the market pressures that occurred in 2022, such as the skyrocketing energy prices, widespread cost-of-living crisis, tax and interest rate hikes they haven’t had their full impact yet,” says Álvaro Antón, head of Iberia for investment firm Abrdn.

That is why he believes that although there will be regional and national variations, it is likely that “headline inflation in most developed markets will reach its peak in late 2022 or early 2023“, Add.

The other point on which economists agree is that the slowdown in inflation will be linked to the growth slowdown, which will cause pain to homes on another side.

Less activity, more unemployment

In the end, if families have to pay more for everything, what happens is that they can buy less, they can spend less on other things like trips or new cars.

Especially if what we are talking about is pay more for basic items like food and energywhich is where the strongest price rises are concentrated.

If we add to this the fact that most central banks have tightened their monetary policy significantly and have raised interest rates, this translates into less consumption by families and less activity by companies.

This last point is the one that can trigger unemployment and drag prices down.

A man buys mate in a supermarket in Argentina

Shopping has become much more difficult.

“It is likely that technical recessions in multiple economies during 2023which will cause global growth to fall below its potential to 2.6%, from 3.3% in 2022,” they forecast in Scope Ratings.

However, from the credit rating agency They rule out a serious recession in the world or that we will see a global financial crisis next year.

In this environment, with the war in Ukraine and geopolitical tensions heightened, with covid spreading across China, the UK facing a winter of strikes and a cold snap in Europe, an economic contraction will be very difficult to avoid.

recession for many

“My forecast for America is recession. You have to have one. Their current job market is tighter than ever in a post-war period and, surprisingly, it hasn’t weakened,” says Steven Bell, chief EMEA economist at Columbia Threadneedle in an interview.

His opinion is shared by other experts. To cool inflation in the United States, they say, it is necessary for the labor market to take a breather.

“I think they need a recession. I don’t think it will be deep. It will be mild and the response will be quick, but I think they need it. And Europe is going to have one too due to the incredible increase in energy prices,” adds Bell.

“And we must not forget that a recession in developed countries, generally leads to recession in emerging marketssays the economist.

A designation that often includes several Latin American countries.

Kristalina Georgieva, Managing Director of the International Monetary Fund

A third of the world will enter a recession, according to the IMF

a third of the world

The IMF also expects that the measures to contain the recession will depress many economies.

In fact, the director of the International Monetary Fund, Kristalina Georgieva, told a news program on the US network CBS that they hope that up to “one third of the world economy” enters recession in this coming year.

Kristalina Georgieva said that 2023 will be “tougher” than last year, since the cycle is slowing down in the United States, the European Union and China, three of the engines of international growth.

It has spread “a pessimism for the economic future of 2023. In some regions of the planet, the economic, monetary and social risk will draw a highly flammable year”, explains the research team from CIDOB, the Barcelona Center for International Affairs, in collaboration with EsadeGeo.

“The risk of a debt crisis expanding into emerging economies during 2023 is increasing”.

“Sri Lanka has been the first alarm. Some of the countries that in 2023 will present a more delicate situation are Pakistan, Egypt or Lebanon,” they add.

A sign showing the exchange rates of the euro and the dollar

A sign showing the exchange rates of the euro and the dollar

But despite the drop in the prices of raw materials, especially oil, the agreement to export grain from Ukraine that gave a break to food inflation and despite the rise in interest rates, measures all designed to subdue inflationthere are also those who prefer to remain more skeptical of the forecasts for 2023 on inflation.

“There is a risk that inflation does not fall as the consensus expects. In fact, that this is what they almost unanimously expect is disturbing because the analyst consensus tends to be more wrong than right,” says Víctor Alvargonzález, chief strategy officer and founding partner of independent advisory firm Nextep Finance.

In fact, 2022 is the clear example of how much reality can deviate from economists’ forecasts.

very persistent

At the beginning of the year, the main organizations affirmed – almost unanimously – that the double-digit inflation that was already registered in many economies was “transitory”. Nothing is further from reality.

“It is possible that this inflation will result much more persistent than people expectBell says.

Another danger that could derail the expert consensus is that the war in Ukraine could get out of hand.

“We are in an indirect confrontation between NATO (through the Ukrainian army) and a nuclear power, Russia, so the longer the war lasts, the greater the risk of accidents or war escalations,” says Alvargonzález.

Another negative force that is there, in the shadow, is the hidden confrontation between China and the United States for global power.

“Right now the US is busy with Russia, but sooner or later he will realize that his biggest problem is China, which is in fact taking advantage of the situation created by the invasion of Ukraine. You just have to look at Xi Jinping’s last visit to Saudi Arabia and how he was received,” says the Nextep Finance economist.

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