Inflation fears to keep central banks in tightening mode

There were signs that supply shortages were starting to ease in some places at the tail end of 2021. World trade was its strongest since shortages began to bite a year ago and industrial production had picked up too, especially in the auto industry as semiconductor supply improved. Our updated G7 Shortages Indicators also suggest that general product shortages began to ease in the US and UK last month. Given the typical co-movement of our indicators, this would imply that other advanced economies might soon be over the worst of their product shortages too. However, the big picture is that shortages remain acute and will take time to unwind. What’s more, these tentatively encouraging pieces of evidence pre-date the Omicron wave, which could yet lead to renewed disruption, particularly if lockdowns become more widespread in China. Central banks sound more concerned about the associated risks to inflation than the hit to activity and we have revised up our interest rate forecasts for several economies accordingly.