But they could also exacerbate inflation if the domestic exchange rate weakens. Adding to the complexity is that monetary policy operates with long lags. If policy is tightened at a pace that does not take into account the effects of previous hikes, we risk a deeper economic downturn or financial stresses. But if policy tightening ends prematurely, we risk destabilising price expectations, entrenching inflationary pressures, and eroding central bank credibility. Of course, the question of how fast core inflation can return to central banks’ target bands is contingent not just on monetary policy. The speed of disinflation is subject to three near-term uncertainties: labour market dynamics, China’s re-opening, and a surge in food and energy prices. The first uncertainty is labour markets: continued labour market tightness could lead to persistent services inflation, especially in the advanced economies. COVID-19 presented the ultimate supply shock for labour markets across the world, as workers exited the labour force in large numbers. Even with the return of most workers post-pandemic, sectoral labour shortages remain severe in many countries, especially in contact-intensive industries such as retail trade, food, hospitality, and manufacturing. With labour markets persistently tight in most advanced economies, nominal wage growth has been robust. There are three possibly structural factors driving tight labour markets and wage pressures. First, workers have been moving away from low-wage services jobs and moving up the occupational ladder, generating worker shortages in these services jobs.

[2] Second, there has been a significant fall in the number of immigrant or foreign-born workers in the advanced economies, particularly among lower-wage occupations. [3] Third, preferences for work relative to non-work activities may have shifted during the pandemic. Recent US data show a persistent decline in desired hours worked especially among better-educated workers. [4] It remains to be seen whether these labour supply shifts are irreversible. Ultimately, so long as labour shortages continue, prices will edge higher compounding the pressure on central banks to hike further later this year. The second uncertainty is posed by China’s re-opening: a stronger-than-expected infrastructure-led rebound in China could pose an upward risk to global inflation. While we can anticipate an uptick in demand from China’s reopening, the extent to which this imparts a renewed impulse to global inflation is unclear. For now, China’s near-term developments appear unlikely to decisively reverse the global disinflation trend in 2023. The recovery of China’s consumer demand is expected to be led by domestically oriented consumer services rather than tradable goods. Unlike in advanced economies, China has a substantial supply of deployable labour suggesting that significant labour market tightening is unlikely. Producer prices in China are continuing to decline. The easing of pandemic-related supply chain disruptions will help moderate producer price pressures, imparting a mildly disinflationary impact on the global economy. However, a sharp rebound in economic activity in China on the back of robust infrastructure spending and an accelerated recovery of the property market could lead to higher global commodity prices.