WASHINGTON (BLOOMBERG) - Global inflation is finally coming off the boil, even if it is set to remain far too hot for the liking of the world's central bankers.

As economic growth slows, prices for key raw materials - from oil to copper and wheat - have cooled in recent weeks, taking pressure off the cost of manufactured goods and food. It is also getting cheaper to move those things around as supply chains slowly recover from the pandemic.

After the worst price shock in decades, the speed at which relief arrives will vary, with Europe in particular still struggling. But for the world as a whole, analysts at JPMorgan Chase estimate that consumer price inflation will fall to 5.1 per cent in the second half of this year - roughly half of what it was in the six months to June.

"The inflation fever is breaking," said Mr Bruce Kasman, the bank's chief economist.

This does not mean an early return to the subdued inflation that much of the world enjoyed before the twin shocks of Covid-19 and the war in Ukraine - or the end of monetary tightening any time soon.

Fed's still hiking

Rents and labour-intensive services are likely to keep getting more expensive, with job markets tight and wages on the rise. There are also broader forces at work, from slowing globalisation to lacklustre growth in the labour force, that may keep price pressures bubbling.

The major global central banks, which failed to see the pandemic price shock coming, are set to press ahead with interest rate increases even as headline inflation tops out. The US Federal Reserve, the European Central Bank (ECB) and the Bank of England are all expected to hike rates again in September.

Fed chair Jerome Powell left the door open to another jumbo 75-basis point increase next month, telling fellow central bankers in Jackson Hole last Friday (Aug 26) that a recent ebbing of US inflation fell "far short" of what policymakers wanted to see. The following day, ECB executive board member Isabel Schnabel said "central banks need to act forcefully".

Some central banks that were quicker off the mark than the Fed to raise rates may take advantage of cooling price pressures to pause their tightening moves.

The Czech National Bank this month left policy unchanged, while the Brazilian central bank is expected to do the same in September. The Reserve Bank of New Zealand may be nearing the end of its aggressive moves, governor Adrian Orr told Bloomberg Television from Jackson Hole.

The soaring cost of living has left politicians as well as central bankers feeling the heat - especially in Europe, where natural gas prices more than seven times higher than a year ago have triggered an energy emergency.

Inflation in the euro area is forecast to accelerate beyond July's record 8.9 per cent and Citigroup predicts that this could exceed 18 per cent in Britain, in part because a cap on energy bills was just lifted.

All kinds of once-unlikely proposals, from nationalisation to power rationing, have been floated to address the crisis.

The United States, by contrast, will experience the fastest slide in inflation among developed economies, thanks in part to the strength of the dollar, the JPMorgan economists said.

That will not stop the Fed from tightening into restrictive territory. Bloomberg chief US economist Anna Wong expects that the Fed will eventually have to raise rates as high as 5 per cent to rid the US of its inflation problem.

'Truly the issue'

Still, the recent decline in several important commodity markets should help dampen prices across the global economy:

• Benchmark crude oil futures have fallen about 20 per cent since early June

• Prices for metals, lumber and memory chips have declined from their highs

• A United Nations index of food costs plunged almost 9 per cent in July, the most since 2008

Much of this appears to stem from a slackening in demand. This is partly because consumers are shifting away from the unusual shopping habits that emerged during pandemic lockdowns, when people spent less on services like hotel rooms or gym memberships and more on goods such as exercise bikes and home computers. Goods inflation "is going to come off a lot", said Goldman Sachs chief economist Jan Hatzius.

The turnaround in commodity prices also reflects the fact that household budgets are increasingly stretched - and economies are slowing worldwide.

Most of Europe is expected to fall into recession in the coming months as the energy crisis takes a toll over the winter. China remains hobbled by its Covid-19-zero policy and a depressed property market. In the US, Fed rate hikes have undercut the once-ebullient housing market and turned high-tech companies cautious.

Even with recession risks rising, bond investors do not see central banks letting up in the near future. Investors are currently betting that by next March, the Fed will have raised rates to around 3.75 per cent, while the ECB's benchmark will be up to 1.75 per cent and Britain's up to 4 per cent.

"Inflation is truly the issue and it remains well above the targets of central banks," said Mr John Flahive, head of fixed-income investments at BNY Mellon Wealth Management. "They do not want to make the mistake of lowering rates and watching inflation go back up.''

'Seen the worst'

One sure sign of slowing demand, according to economists at Morgan Stanley, is that growth in imports across major economies - after adjusting for inflation - is now subdued, while exports from Asia, the world's factory floor, are starting to weaken.

The easing of logistical logjams is also contributing to lower prices. The New York Fed's index of global supply chain pressure has dropped to the lowest level since early 2021. Short-term shipping rates are falling, transit times across oceans are shortening, and companies are even starting to moan about bloated inventories.

"We were getting about a 65 per cent service level from our strategic suppliers. This is back up to a plus 90 per cent now," Mr Randy Breaux, the president of Motion Industries, a US provider of industrial components, told a conference this month. "We really think that we have seen the worst of the supply chain issues."

If that is the case, the Fed may not have to raise rates as much as feared to reduce demand and rein in inflation, according to Apollo Management chief economist Torsten Slok.

Still, even if goods prices slow, there is a risk that the post-lockdown spending shift will instead drive up the price of services such as going to the movies or staying in hotels. Those may prove stickier.

US rental costs, in particular, are being boosted by a dearth of affordable housing. This may put upward pressure on inflation into 2023 and "maybe even beyond", Goldman's Mr Hatzius said.

'Not very far'

Rising wages could also keep inflation around for longer.

Labour costs are by far the biggest expense for many businesses, especially in service industries. With job markets in the US and Europe still tight, companies are being forced to boost pay. To maintain profits, firms would then need to pass along their higher wage bills to consumers.

"We are quite worried about a wage price spiral," said Mr Robert Dent, senior US economist at Nomura Securities. "One may already be happening to a certain degree."

There is also the argument that inflation will not return to pre-Covid-19 levels because the world was already poised to change. Globalisation is fraying - a process accelerated by the war in Ukraine - and measures to tackle climate change could add another layer of costs, at least in the short term.

In a report this month, economist Dario Perkins of TS Lombard predicted that such forces will combine to create what he calls a "new macro supercycle".

Central banks "will try to prevent this secular transition, even at the cost of a recession", but they "can't stand in the way of structural shifts", he wrote. "The persistent 'low-flation' era is over."