Global inflation dynamics remain at the forefront of monetary policy decisions as central banks navigate a shifting economic landscape.

Understanding the inflation trajectory

Between 2022 and 2025, headline inflation surged in the aftermath of the pandemic, peaking at nearly 9% in late 2022. As supply bottlenecks eased and demand normalized, global inflation eased below 5% by late 2024. Yet, price pressures in 2025 remain well above the low levels of the 2010s.

The above-target rates reflect a confluence of factors, including strong wage growth amid low unemployment and moderately looser fiscal stances compared to austerity years. Trade protectionism and elevated energy prices have also added upward momentum, preventing a swift return to pre-pandemic norms.

Key drivers and structural influences

• Supply chain normalization reducing goods-price pressures
• Lower energy and food prices balancing out overall CPI
• Persistent protectionist measures strengthening costs
• Robust labor markets fueling wage-push inflation

As global trade barriers rise, businesses face higher import costs and reduced competition, which can translate into sustained price hikes. Meanwhile, energy markets are influenced by the green transition, increasing renewable output, and changing demand patterns.

Central bank policy responses

Having implemented aggressive tightening in 2022–2023, major central banks are now adopting a cautious easing stance. They remain data-driven, ready to pause or reverse course if inflationary pressures re-emerge.

• Bank of England: Reduced its Bank Rate by 25 basis points to 4.25% in May 2025, with a divided MPC signaling uncertainty over the pace of future cuts.
• European Central Bank: Cut key rates by 25 basis points in June 2025 and maintained a data-dependent approach in decision-making.
• US Federal Reserve: Balancing its dual mandate, monitoring labor market slack and wage trends before adjusting the federal funds rate.

Beyond rate adjustments, central banks are unwinding quantitative easing. The BoE has trimmed its balance sheet from £895 billion at its peak to a projected £590 billion by mid-2025, aiming to reduce excess liquidity without disrupting markets.

Lessons from history and lingering risks

Economic history warns of long periods of elevated inflation becoming entrenched if monetary policy is insufficiently robust. The 1970s demonstrated how delayed tightening can anchor high inflation expectations, making it harder to bring rates down later.

Disinflation lags are real. Policy decisions take time to ripple through consumer prices and wage negotiations. Today’s moderation partly reflects past rate hikes rather than immediate actions, underscoring the importance of forward-looking communication.

• Inflation persistence can de-anchor expectations and wage demands over time.
• Global spillovers mean emerging markets face divergent pressures, especially those with volatile currencies.
• Credibility of central banks remains paramount to anchoring long-term expectations.

Implications for growth and financial markets

Slower inflation paves the way for potential ‘‘soft landings,’’ where economies cool without tipping into recession. Forecasts for real GDP growth in major advanced economies hover around 1% in 2025, reflecting restrained consumption and investment.

Financial markets price in continued rate cuts in the second half of 2025, particularly if inflation data persistently undershoots target ranges. However, any surprise uptick in wage inflation or energy costs could prompt central banks to delay easing.

Looking ahead

As the global economy transitions from crisis-driven shocks to structural adjustments, central banks must strike a delicate balance. They need to support fragile growth while preventing inflation from resurgent waves. Forward guidance, balance sheet tools, and data-driven policy will remain crucial instruments.

In an interconnected world, coordination among major central banks may help mitigate disruptive currency swings and capital flow volatility. Yet, national mandates and economic idiosyncrasies will continue to shape individual policy paths.

Ultimately, the evolving narrative of disinflation underscores the importance of credible institutions, timely action, and clear communication. By learning from past oversights and embracing a disciplined approach, policymakers can guide the global economy toward stable prices and sustainable growth.