In Japan, inflation is the highest it has been in several decades, with headline inflation at 3.5% and core at 4.1%. Here, it’s especially notable as it’s happening alongside increases in both wage growth and inflation expectations, raising the probability that Japan has at last exited its long period of deflation. If confirmed, the BoJ would need to begin unwinding its ultra-loose monetary policy.
In China, inflation is very low, with the headline reading at 0.1% and core at 0.7%; unemployment is higher than normal, keeping wage growth low. Inflation is broadly elevated in EMs but not as high as in DMs (compared to average inflation rates).
Looking ahead, we expect inflation to continue to fall but recognize that reducing inflation from approximately 5% to 2% is likely to be a harder and longer process than the jump from 8% to 5%. The key reason for this is that labor markets need to weaken materially for wage growth to fall, and wage growth adjusts slowly and at a lag to economic changes. For inflation to hit 2%, wage growth needs to be close to 3%–4%, with the difference being productivity growth.
As it stands in the US, wage growth is closer to 5% — a rate consistent with consumer price inflation of 3%–4%. We observe similar dynamics in the eurozone, the UK and Japan. Tighter monetary policy should eventually lead to higher unemployment and lower wage growth, but this will take time.
