BIS research points to ‘slower disinflation ahead’

Inflation has fallen rapidly in many economies, but the improvement may slow in the months ahead, research by the Bank for International Settlements finds.

An article in the bank’s quarterly bulletin breaks down the post-Covid surge in inflation to study the sectors that played the biggest roles in driving price rises. 

Pongpitch Amatyakul, Deniz Igan and Marco Jacopo Lombardi find that goods prices were the main drivers during the “initial phases” of the surge. However, they say that their importance has since waned, while services prices have gained in significance.

The authors say the growing contribution of services to headline inflation figures “may make inflationary pressures more stubborn”, since services inflation is “structurally more persistent”.

They attribute this in part to the greater reliance of the services sector on labour. Wages rose rapidly after the “acute phase” of the pandemic, the authors say, and these costs tend to persist because of the length of labour contracts.

Tight labour markets and a fall in real wages “add to the risks ahead”, they warn: “These risks increase the longer inflation remains above target, which could lead to an adjustment in wages.”