2022 : THE YEAR INFLATION PEAKED

Inflation remains the single most important macro - economic variable in determining the outlook for the global economy in the coming years. After all, the development of inflation will decide how far central banks across the globe will have to tighten their policy and how severe a slowdown central banks will have to engineer to break the current inflationary dynamics. We take a close look in this report at t he inflation dynamics in the euro area and the US. We also analyze whether China has now turned into a source of inflation for the rest of the world. The final part of this report assesses the food price developments and their contribution to inflation in different parts of the world. Overall, we expect inflation to decline significantly during the course of this year on the back of softer growth and easing supply chain problems. We acknowledge, however, that the size of the initial inflation shock may have triggered a self-reinforcing dynamic in the inflation process that will imply a slower decline than we currently envisage. Such a scenario would eventually lead to a more aggressive policy tightening by central banks. In the end, central banks can control inflation, although it is not certain at this point how much economic damage they will have to inflict to get inflation back to target.