Regional insights

AMER: North, Central and South America

The United States is most affected by a transitory demand shock, with Bloomberg economists anticipating a shorter-term inflation scenario for its economy.

 

The U.S. economy is mostly affected by a transitory demand shock, experiencing heat off the back of a post-pandemic demand surge. New gauges built by Federal Reserve economists indicate that strong demand for goods and services may be starting to overtake supply constraints – from the pandemic and the invasion of Ukraine – as the driver of U.S. prices.

As the country is more self-sufficient energy-wise, its energy transition can also be expected to have deflationary effects in the longer term. This is because lower long-term demand for fossil fuels will push fossil fuel prices down and because the transition will create more demand from large-scale investments. This gives the Federal Reserve more leeway to aggressively and quickly increase interest rates to tackle inflation without damaging growth prospects. In this context, Bloomberg economists anticipate a shorter-term inflation scenario.

 

 

APAC: Asia Pacific

Inflation in APAC’s two largest domestic economies, China and Japan, is not as intense as in other regions. The deflationary pressure China is experiencing may change when the country’s zero-COVID policy eases in 2023, while Japan is only just beginning to experience inflationary pressure after years of deflation. 

 

China is still operating under strict COVID rules, which create a weakening demand shock and tames most, if not all, inflation pressure in China (although as in other locations, food prices have increased dramatically). The country has also been experiencing a severe property downturn, limiting commodity demands linked to construction. In contrast to most regions, China is experiencing deflationary pressure. This may change in 2023 when COVID rules are expected to recede.

Japan has experienced a long period of deflation characterized by downward pressure on asset prices and structurally low/negative rates principally led by high levels of savings and an aging population. However, it has recently been experiencing much stronger inflationary pressure. The yen has been devalued significantly due to the low-rate policy that the country’s central bank, the Bank of Japan, seems determined to maintain. Japan's public debt level remains very high, but as most debt holders are private citizens, Japan is under less pressure to increase interest rates.

 

 

EMEA: Europe, Middle East and Africa

 

Bloomberg economists anticipate a longer-term inflation scenario for EMEA, as most countries are suffering from supply shock-induced inflation that has exacerbated structural supply issues and is compromising the stability of financial systems. 

Most EMEA countries are suffering from inflation caused by a supply shock that has exacerbated structural supply issues. Increasing interest rates may lead to a vicious circle of stagflation (persistent high inflation combined with high unemployment and stagnant demand in a country’s economy). In Europe, the European Union’s stimulus growth policy contradicts the Central Bank’s inflation taming policy. The European Central Bank’s actions will be limited because, in this scenario, increasing interest rates to fight inflation would damage growth prospects and further limit the scope of action for debt-burdened European countries.

As illustrated by the fiscal policy announcement fiasco that occurred in the United Kingdom in September 2022, markets can react very aggressively and rapidly to government measures and derail trust in its  ability to lead an economy during inflationary times. When financial system stability is compromised, Bloomberg economists expect a longer-term inflation scenario.