Inflation past the peak, but big challenges lie ahead

Inflation has finally turned a corner. Headline inflation rates fell in March in all 14 economies that we cover, the first synchronised drop in more than a decade. This partly reflects base effects resulting from the sharp rise in prices after the war in Ukraine started last year, but there were also firmer signs that month-on-month price rises have cooled. The coming months will bring further large falls in headline inflation, but we remain concerned about just how far the disinflation process will go this year and into 2024. Core consumer prices in March were still rising at a monthly pace that was far above pre-pandemic norms and nowhere near rates consistent with inflation in low single digits. While we expect interest rate cuts across much of the region by year-end, we think that analysts and investors are generally overestimating the extent of monetary easing which will be delivered by the end of 2024.