Three Major Factors Predicting a Short-Term Decrease in Inflation

Three Major Factors Predicting a Short-Term Decrease in Inflation According to Economists

Despite record high levels of inflation across the U.S and Europe, Atradius economists predict that these numbers will be short-lived. Slim chances of another round of skyrocketing energy prices and soaring rates of unemployment limit the potential for higher inflation in the short-term. Pandemic-related factors were the main cause of the current high inflation rate as well as energy price increases related to the Russian-Ukraine war.

“In order to keep inflation from spiraling out of control and to ensure policy credibility, the Federal Reserve has moved forward with an aggressive tightening cycle, which means raising interest rates,” says Atradius Economist Dana Bodnar.

The European Central Bank has also followed suit in July. The ECB predicts a second rate increase in September, dependent on whether energy prices hold, among other geopolitical pressures.

In addition to actions by the ECB to stabilize the eurozone, the following factors predict a decrease in short-term inflation:

• Trends in globalization, digitalization and an aging population continue to moderate inflation as they have over the past few decades.
• A decrease in demand for goods has eased supply chain pressures – a major contributor of high inflation.
• European companies have experienced a minimal 3% increase of wages year over year, which prevents new economic imbalances from arising.

What does this mean for the U.S. economy? Bodnar also mentions that “overall, the path to a soft landing is quite narrow but we expect the U.S. economy to avoid a recession.”

Bodnar also highlights that the U.S. Consumer Price Index growth rate held steady for the first time since May 2020, which showcases a downward trend in European and U.S. inflation.

For an in-depth look at each of these factors as well as details on the outlook of the eurozone, view the full report here.