Page 70 - CII-ARTHA

ARTHA

B. Trends in Inflation and declining energy prices and weaker industrial demand.
Monetary Policy In response to the improving inflation outlook and
subdued growth conditions, the European Central Bank
(ECB) began monetary easing, lowering policy rates by
Broad Disinflation, Uneven Pressures and around 75 basis points in the first half of 2025.
Monetary Policy Divergence Interestingly, inflation continued to steadily decelerate to
3.8 per cent in Q3 and 3.3 per cent in Q4, as easing input
According to the IMF, global inflation moderated to 4.1 per costs gradually filtered through the economy, signalling
cent in 2025, and was initially expected to moderate sustained disinflation.
further in 2026, mainly due to benign global commodity
prices. Inflation dynamics in 2025 reflected a gradual but
uneven normalization across economies. While headline
inflation moderated in most advanced economies amid Global inflation was moderating
easing energy prices and tighter monetary conditions,
underlying pressures, particularly from services and in 2025 but price stability
wages, remained persistent. At the same time, weak remains uneven, with inflation
domestic demand kept inflation subdued in parts of the facing severe upside risks due to
global economy. These divergent trends shaped rising energy prices in 2026
monetary policy responses, with central banks changing
rates at different paces.
UK inflation remained elevated through much of 2025,
Inflation in the US remained broadly stable through 2025, rising from 3.7 per cent in Q1 to 4.1 per cent in Q2, largely
easing from 2.7 per cent in the first quarter to 2.4 per cent reflecting strong wage growth and persistent services
in the second quarter, on the back of moderating energy inflation. Moreover, in the first quarter of 2025, the Bank of
prices. The US Fed shifted policy stance towards England cautiously reduced policy rates by 25 basis
cautious easing in the second half of the year, delivering points, despite the slight uptick in inflation. This is
rate cuts (by 75 basis points) to support economic activity, because the inflation elevation was viewed as temporary
while keeping inflation expectations anchored. However, and driven by one-off regulated price changes, rather
inflation picked up to 2.9 per cent in the third quarter than sustained demand pressures. The Bank of England
driven by robust consumption, higher living costs, further reduced rates by 25 basis points in Q2. Inflation
increased input prices and labor market tightness. remained at 4.1 per cent in the third quarter, indicating
Incidentally, by the fourth quarter, inflation edged down, sticky underlying price pressures despite weakening
back to 2.7 per cent, suggesting gradual normalization in domestic demand. As growth moderated, the Bank of
price pressures Inflation in Europe moderated steadily England kept easing monetary policy in the second half of
through 2025, easing from 4.1 per cent in the first quarter the year, lowering policy rates by another 50 basis points
to 3.9 per cent in the second quarter, buttressed by (the cumulative rate cut in 2025 was 100 basis points).

Inflation (2025) (y-o-y%)

4.1 3.9 4.1
3.7
4.1
3.8
2.9 3.7 3.8 2.9
3.3 3.4
2.7 2.7
2.4 2.7

0.6
-0.1 0.0 -0.2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
United States Europe United Kingdom Japan China

Source: IMF CPI Dataset

70