Charts of the Week: Inflation Focus

The Blue Chip Inflation Consensus An examination of the evolution of CPI projections for 2024 in the world’s major economies over the past few months suggests much more confidence from US and European economic forecasters about the near-term inflation outlook. As shown in chart 1, inflation forecasts for the US and the euro area have remained fairly stable, within a narrow range of 2.2% to 2.6%, over recent months. This contrasts with China, where inflation projections have steadily declined—from 2.6% in January 2023 to just 0.5% in the latest September Blue Chip Survey.

Capacity pressures That heightened confidence from forecasters that inflation is more predictable reflects a number of factors including fading supply side tensions, lower energy prices, more restrictive policy settings and weaker demand. Against that backdrop it’s certainly of note that aggregate estimates of the mismatch between demand and supply in the US and euro area – the output gap – have now moved back to more neutral territory (see chart 2).

US unit labour cost inflation Recent data have also highlighted growing fragility in the US labour market, alongside a modest improvement in productivity growth over the past year. This combination has led to a significant decline in unit labour cost inflation (chart 3). This is arguably important, as wage pressures play a key role in shaping the outlook for service sector CPI inflation.

Labour force participation rates One of the issues that’s perplexed the forecasting community in recent years concerns the evidence suggesting that inflationary pressures have been subsiding even as labour markets have remained tight. One factor that’s arguably not received as much attention in this debate as it should have, concerns the rise in remote work in the post-pandemic period. An examination of the data for the G10 economies reveals that labour force participation rates have typically risen sharply over the past 3 years (see chart 4 for an example from the Netherlands). And remote work could have been a driver by enabling greater participation, especially for those with childcare responsibilities or health issues, improving labour market flexibility and helping to alleviate potential inflationary pressures.

Working from home Further evidence on this issue can be found from a recent IMF analysis (see Working from Home), one snippet from which concerns data from the American Time and Use Survey. As chart 5 below suggests, that latest survey shows that the American workforce now spends a much lower fraction of their working day on commuting even though the proportionate time they spend working has remained roughly the same it was in the pre-pandemic period.

Artificial Intelligence and productivity By expanding the potential pool of labour and reducing companies’ capital needs (e.g., office space), the global shift toward remote work could benefit both economic growth and inflation. Another key factor, however, that may influence the world economy’s supply side fabric in the future is Artificial Intelligence (AI). The September Blue Chip Economic Indicators survey certainly revealed much optimism about AI's potential to boost productivity. However, opinions on when the productivity payoff would appear varied. While fewer than 10% expected an impact within 1 to 3 years, half of the respondents predicted it would materialize in the next 3 to 5 years (see chart 6 below).