Underlying inflation to linger even as headline rates fall

The inflation outlook for 2022 will be dominated by three key themes. First, headline rates will fall owing to a mixture of fading re-opening inflation, falling commodity prices, and base effects dropping out of the year-on-year comparison. Second, ongoing product shortages and high shipping costs will maintain upward pressure on goods inflation into the second half of the year. If Omicron further disrupts already stretched supply chains, goods inflation could be higher than we are forecasting, keeping overall inflation higher for longer. Third, price pressures will continue to be higher in the US compared to other advanced economies given its tighter labour market. In general, we expect inflation to be higher than other forecasters next year. By 2023, most of the factors dragging on headline rates will have run their course, and goods inflation should ease as shortages improve. Even so, stronger cyclical price pressures in the US should see core inflation there settle at 3%, as Fed tightening proves insufficient to fully rein in inflation.