The currently high level of inflation remains the biggest threat to the global economy, according to the OECD. Granted, we already seem to have passed the inflation peak several months ago, notably in the United States and the Eurozone. But so far inflation has not fallen much. Yet several factors are helping to reduce inflationary pressures. One of these is the ongoing reduction in the supply-demand imbalance: indeed, supply is coming under fewer constraints while they seem to be rising for demand.
What signs of a turnaround in supply are we talking about? The biggest and most visible factor is the reduction of procurement tensions, evidenced by the sharp drop in delivery times in the manufacturing sector since the beginning of 2022. At the European level, according to European Commission surveys, we can also see a more recent and still timid decline in the percentage of manufacturing companies who claim that supply-side factors are limiting production.
It is interesting and worth watching at the same time, that, since about mid-2022, the same European Commission surveys have also been signaling that demand emerges as a factor limiting production. This rise is still relatively small and it is also not unexpected. Yet the reversal of the situation, this inversion of supply and demand trends (from a large imbalance between strong supply-side constraints and weak ones on the demand-side), there is a likely tipping point that is worth monitoring.
Another strong disinflationary signal on the supply side is the sharp reduction in input prices over the past year, as shown by the PMIs. Yet there are still major pockets of inflation resilience and persistence too. Food price inflation is one such factor, notably in the eurozone. Corporate pricing power remains high too, as evidenced by the limited, even non-existent decline in the output prices component of survey data. This helps protect corporate margins but it also contributes to keep inflation running high, like wage acceleration and the diffusion of previous price increases.
All in all, in the current battle between the two, disinflationary supply-side forces are only slightly winning out over inflationary demand-side forces. But in the months ahead, disinflationary forces are expected to strengthen while inflationary forces decline, which should help bring down inflation more rapidly. Check back in a few months for another update on our inflation forecast and the long-awaited disinflation. Thanks for watching and tune in again next week for a new edition of EcoTV Week.
