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Banking & finance
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Tai Hui
Tai Hui

Macroscope | Bumpy 2023 for markets as central banks face high inflation and low growth

  • Risk of policy error is rising as policymakers work to cool inflation without putting out demand, especially as growth slows in the US and Europe
  • Inflation in Asia is less of a challenge but Japan’s situation is precarious and policymakers must be vigilant

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US Fed chairman Jerome Powell speaks at the Brookings Institution in Washington, DC on November 30. Investors are concerned that the central bank’s resolve to keep raising rates could tip the economy into a recession. Photo: Bloomberg
Tai Hui

Driving in a straight line is relatively easy, but going around a corner requires greater skill. For central bankers, 2022 would seem like a straight road, given what could come in 2023. The risk of policy error is rising.

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2022 was a year of strong growth and high inflation for the United States and Europe. The tailwind of recovery from economic reopening and fiscal stimulus, especially in the US, prompted a robust recovery in the job market and demand.

Meanwhile, the Russia-Ukraine conflict caused a spike in energy and food prices globally. This combination of inflation in both demand and supply led to the sharpest price increases in over 40 years.

To handle this, the required policy from central banks in the developed world was straightforward. They could raise interest rates to cool demand and curb inflation pressure. The US Federal Reserve, European Central Bank and others in both developed and emerging markets executed their policies as needed. China and Japan were exceptions, given China’s economic challenges from the pandemic, and Japan’s sluggish consumption recovery.
As 2023 approaches, the economic backdrop is becoming more complicated and this could be a real test for central bank officials’ decision-making and their ability to communicate with the market.
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First, inflation is coming down. The recent decline in food and energy prices, especially based against the highs of 2022, suggest the impact of these items on headline inflation should be much weaker, even making a negative contribution. In the US, the price momentum for other items is also slowing down. In the inflation report for November, prices for core items such as cars, healthcare and electric appliances actually fell.

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