Entering 2023, headline inflation in the United States and eurozone has started to soften. Certain goods, such as used cars, are showing a deflationary trend. But central bankers remain worried about the risk of price pressures broadening. Inflation across the services sector is increasingly outpacing price increases for goods while labor markets in advanced economies remain resilient, creating the possibility of wage-price spirals. The strong employment numbers paired with slowing inflation are also fueling hopes that soft landings can be achieved.

Energy and food prices, pushed sharply higher by the war in Ukraine, have started to come down and supply-chain disruptions have eased. The prices to move shipping containers across the Pacific are now back to pre-pandemic levels. This helps central banks trying to rein in inflation. However, a more deadly virus variant, significant military escalation by Russia, or a different unexpected shock could trigger renewed price increases, complicating central bankers’ plans.

With a recession in 2023 remaining the base case in many advanced economies, including the UK and eurozone, central bankers’ commitment to continue raising rates will be tested by markets and political actors. Central bank heads are wary of lowering rates too early only to have sticky core inflation force a U-turn back to rate hikes. One way for central banks to delay lowering rates in case of a recession or financial accident might be to pause their balance-sheet tightening.