Victory in sight—but the war on global inflation isn’t won yet

Central banks have made substantial progress in the fight against inflation. In July 2022, the median inflation rate worldwide was 9.4 percent, the highest since 2008. By last month, it had been whittled down to 2.9 percent. This decline in inflation has been broad-based: in 90 percent of countries it is now lower than in July 2022.

Still, the war is yet to be won. Global inflation is 0.7 percentage points higher than it was on the eve of the COVID-19 pandemic in early 2020. In July 2022, inflation was above target ranges in all countries with inflation-targeting central banks. The share is much lower now, but inflation still exceeds target ranges in more than 40 percent of these countries.

In short, central banks in major economies may have good reasons to begin cutting interest rates in the coming months. However, they are unlikely to sharply reduce rates until they are convinced inflation is firmly on a path back to the target ranges. This means monetary policy will continue to be restrictive, implying that emerging market and developing economies (EMDEs) could face tight global credit conditions for some time.

Meanwhile, potential disruptions in global energy markets and supply chains could prolong the quandary many central banks are facing: how to steer inflation down to target ranges while engineering a soft landing.

Slower pace of disinflation

Since peaking in 2022, inflation has waned globally, declining toward central bank targets in many advanced economies and EMDEs. Plummeting commodity prices—which dropped by nearly 40 percent between mid-2022 and mid-2023—accounted for over 2 percentage points of the overall reduction in global inflation between 2022 and 2023. Commodity prices have remained mostly range-bound so far this year, limiting the downward pressure on inflation. Meanwhile, inflation in consumer services has remained stubbornly high this year in advanced economies, despite recent reports showing headline inflation decreasing slightly faster in some major economies.

Inflation dynamics have shown significant variation across EMDE regions. Europe and Central Asia saw both the largest pickup in inflation and the sharpest decline. Most countries in the region were heavily exposed to the Russian invasion of Ukraine and the food and energy price pressures that resulted. In contrast, inflation has remained low and steady in the East Asia and Pacific region, where subsidies moderated the impact of the global decline in commodity prices and spare capacity persisted.
 

Figure 1. Inflation is waning

^{Sources: Eurostat; Federal Reserve Bank of St. Louis; Haver Analytics; World Bank.}

^{Note: a. Panel shows median year-on-year consumer price inflation excluding food and energy. Sample includes up to 31 advanced economies and 46 EMDEs. Last observation is June 2024. b. CPI refers to consumer price index. Chart shows median year-on-year inflation by region. Sample includes up to 108 economies across East Asia and Pacific (EAP), Eastern Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), Middle East and North Africa (MNA), South Asia Region (SAR), Sub-Saharan Africa (SSA). Last observation is June 2024.}

Inflation expected to fall to central bank targets in 2026

Inflation is projected to continue on its downward path, falling from 4.9 percent on average in 2023 to 3.5 percent in 2024, before reaching levels broadly consistent with average country inflation targets in 2025-26. Surveys of inflation expectations similarly imply gradual global disinflation over the next two years.

Core inflation is expected to soften as demand for services moderates, easing services inflation just as goods disinflation reaches a trough. Weaker demand for services is also expected to help moderate wage growth, particularly in advanced economies. Supply disruptions are expected to continue to fade. Finally, elevated real policy rates in major economies are set to restrain interest-sensitive demand components. 
 

Figure 2. Inflation components and expectations

^{Sources: Haver Analytics; Oxford Economics; World Bank}

^{Note: a. Median three-month annualized inflation rates by component; averages computed over months in the first and second halves of 2023, and year-to-date in 2024. Sample includes up to 36 advanced economies and 101 EMDEs. b. Model-based GDP-weighted projections of consumer price inflation using Oxford Economics’ Global Economic Model. Sample includes 65 countries, including 31 EMDEs. Excludes Argentina and Venezuela. Confidence bands are derived from Consensus Economics.}

Geopolitical tensions and other inflation risks

Geopolitical tensions could create inflationary shocks, either by raising oil prices or by disrupting logistics or production more broadly. Although the impact of the conflict in the Middle East on global inflation has been limited so far, an escalation could sharply increase oil prices given that the region accounts for nearly 30 percent of global oil production.

When oil prices increase by 10 percent, global inflation tends to jump by 0.35 percentage points within a year. If there are significant second-round effects on wages and broader production costs or if inflation expectations shift higher, large energy price increases could drive up core inflation, too.

Ongoing conflicts have already scrambled shipping routes and caused a sharp increase in freight costs. Escalating protectionist measures damage trade networks, especially global supply chains, and potentially raise production costs. Although their impact on consumer price inflation has been limited so far, persistently high shipping and production costs may eventually prompt producers to pass them on to consumers.

These upside risks to prices come at a time when inflation remains above targets in over 40 percent of countries, though with significant variation across income levels. In advanced economies, where central banks generally took longer to respond to the inflation run-up, almost 50 percent of economies were still experiencing above-target inflation at the end of June. In contrast, more progress has been achieved in EMDEs, where inflation remains above targets in just under 40 percent of these economies.
 

Figure 3. Inflation scenarios and targets

^{Source: Oxford Economics; Haver Analytics; Ha et al. (2024).}

^{Note: a. The blue dashed lines indicate baseline forecasts for global consumer price inflation weighted by GDP expressed as an annual average. Orange and red lines depict outcomes under moderate and more severe conflict-related disruptions to oil supply, occurring in mid-2024. Model-based GDP-weighted projections using Oxford Economics’ Global Economic Model. b. Panel shows the share of EMDEs and AEs with inflation above target. Sample includes 31 EMDEs and 31 AEs. Last observation is June 2024.}

Light at the end of the tunnel?

An array of forces are now in place to lower global inflation in the coming months. Given the experience of the past two years, however, one thing is almost certain—the process of global disinflation will have its surprises.

Central banks in most advanced economies are now inclined to ease monetary policy. However, they will be measured in cutting rates because they need to see greater moderation in the slow-moving prices of services. They also need to leave room to maneuver in case upside risks to inflation materialize. For EMDEs, many of which will continue to face challenging global credit conditions, monetary and fiscal policies need to remain sufficiently flexible to adjust to the shocks that can be associated with the disinflation process. The world may be on its way to winning the fight against inflation, but it’s too soon to declare victory.