 A 3%-pt 1H22 inflation shock cushioned by falling savings, fiscal ease  Despite the shock, central banks lean toward returning to neutral  The spirit may be willing, but EU will struggle to quit Russian gas  Next week: BoE and Fed up; weak US and China retail sales The best way out is always through Calibrating macroeconomic views is a challenge amid the uncertainty of war and disruptive geopolitics. With credit channels relatively unscathed, we still view commodities as the primary channel of transmission to inflation and growth. This week’s news that the US closed off energy imports from Russia and the European Commission proposed a sharp cutback of natural gas imports from Russia increases the risk of a larger shock. However, we continue to see alternative sources of oil and are skeptical that EU aspirations for energy independence can be realized over a short horizon. While risks remain skewed to the upside, our baseline view is that the price of Brent crude will remain close to $110/bbl through midyear and that European natural gas prices will hover at about €120/MHw.

Higher energy prices and upward pressure on food and core prices look set to generate a material further inflation shock. Incoming February readings show that an already significant inflation spike is intensifying and we have raised our forecast for 1H22 global CPI inflation to 7.1%ar, a multi-decade high. A boost to earnings of commodity producers will help offset this squeeze. But history shows that the marginal propensity to consume of commodity consumers is far larger and more immediate. Thus, the 3%-pts annualized upward revision to our 1H22 inflation forecast over the past four weeks provides a useful scaling of the principal shock hitting the global economy (Figure 1).

Given the magnitude of this shock, the threat to the global expansion comes from a drop-off in consumption that feeds depressed sentiment, weakening job growth, and tightening financial conditions. Our forecast sees the expansion dented but not derailed by this shock. Over the past month we have revised down our 1H22 global GDP growth forecast by 1.5%-pts at an annual rate, a drag that leaves global growth still running at potential. Our view of resilient growth in the face of this large shock rests on three important judgments: