Entries for 'Inflation'

A disinflation trend has ended in the CEE-4 region, limiting room for future interest rate cuts. Historic-low unemployment rates keep wage increases above inflation across the region. Renewed depreciation pressures pose a risk, should public debt concerns trigger a selloff.

The labor market saw once again a surge in employment growth … … however, this increase is largely restricted to a few sectors. Layoffs have increas...

Emerging markets have seen a "great moderation" of inflation in recent years. We see substantial risks of a synchronized reversal as DM inflation spills over. Central banks in EM started hiking rates earlier than those in DM in this cycle. However, with inflation expectations still less anchored in emerging markets, and the share of commodities in EM consumer price baskets much higher, they will have to continue hiking proportionally more than DM going forward.

We apply a Taylor Rule-based approach to policy making in the CEE-4 and find that rising inflationary pressures point to a need for rate hikes in three of the four countries: the Czech Republic, Hungary, and Poland. Closing output gaps also contribute, while lower real rates provide room.

A recent pickup in U.S. inflation has caused concerns among investors about EM. Inflation is above target in some key EMs and central banks are already cautious. At the same time, core inflation is still subdued compared to prior shock episodes. If U.S. yields continue to rise, EM bonds will likely come under further pressure. Among key EM, we are especially concerned about Brazil, South Africa, and Turkey.

We update our analysis of EM inflation dynamics in light of the COVID-19 crisis. Core inflation is a better gauge of domestic balances than the headline number. In many emerging markets, core inflation slowed in Q2 compared to early-2020. This, together with higher credibility, allowed many central banks to ease policy. While inflation risks appear moderate, fiscal dominance could change the picture.