High Energy Prices Stoke Inflation; Central Banks Chart Tightening Course

Workers arrange imported wheat at a warehouse in Shimanzi, Mombasa. Large consignments of wheat being imported by traders in Tanzania through the port of Dar es Salaam is finding its way into Kenya duty-free on the basis that it is locally produced in Tanzania. Photo credit: Nation

Economic forecasters continue to trim growth estimates. In June, the World Bank cut its global GDP growth projection for 2022 to 2.9% from 4.1% projected in January.

The OECD composite leading indicators likewise point to general economic deceleration in the coming months. The narrowing of growth outlooks is attributed to surging energy and food prices, the effects of the war in Ukraine on supply and trade, and rising policy interest rates intended to cool inflation.

At its June meeting, the US Federal Reserve announced its largest policy-rate hike in decades, of 0.75%, bringing the Fed funds rate to a range of 1.5 to 1.75%. The Fed indicated that future hikes could take the policy rate to 3.8% in 2023.

Fed chair Jerome Powell stated that the objective is to bring inflation down toward a 2% target by cooling consumer demand without creating a recession. Both the Swiss National Bank and the Bank of England announced policy-rate increases as well.

The European Central Bank (ECB), meanwhile, outlined a less aggressive policy, instead placing more emphasis on safeguarding the postpandemic recovery. The ECB plans a quarter-point hike in the interest rate in July, which would bring the rate, which is in negative territory, to zero.

The higher central bank policy rates are driving up the cost of capital for governments, measured in rising bond yields (Exhibit 1).

In Europe the Italy–Germany ten-year bond spread reached 2.5%, the highest level since 2020, with rates of 4.2% and 1.7%, respectively. The cost of borrowing is rising too: in the United States, the average 30-year mortgage rate for a home loan is approaching 6%.

Consumer inflation in the United States reached an annual rate of 8.6% in May, the highest level in 40 years. In McKinsey’s June survey of economic conditions, inflation now heads the list of concerns cited by respondents as an economic risk to their home country’s economy (followed by geopolitical conflict and supply chain disruptions).

In the eurozone, inflation is at record levels: consumer inflation reached 8.1% while producer-price inflation reached a staggering 37.2% on soaring energy prices (15.2% excluding energy prices).

Inflation is also high in emerging economies, including India (7.0%), Brazil (11.7%), and Russia (17.1%).

In China, consumer inflation remains low (2.1%), since key prices are largely controlled, but the producer-price index is at a historic high; in India too, wholesale price inflation is running at a 30-year high (15.9%).

Against inflationary headwinds, retail sales and consumer confidence surveys have generally declined. The OECD consumer confidence indicators are mostly lower, though moderate improvements were recorded in the United States and Brazil. Retail sales also improved in the United States while slowing in other surveyed economies.

The purchasing managers indexes (PMIs) for manufacturing and services mostly show expansion in both developed and emerging economies, reflecting persisting strength in overall demand.

These near-term indictors are pointing toward slower growth, however. In the United States and Europe, flash PMI estimates for June show a sharp retreat in both sectors from a month or two prior. Manufacturers in diverse sectors, notably auto and aircraft manufacturing, face supply chain issues and labor shortages as they struggle to meet production demands.

World trade expanded 0.5% in April (−0.9% in March), despite a plunge of 4.6% in exports from China—a result of lockdowns in Shanghai. In addition to China, the eurozone and India measured declining monthly exports, while imports moderately declined in most surveyed economies.

The Container Throughput Index ticked down to 122.8 in April (123.3 in March); container throughput fell significantly in China’s ports but expanded in most other ports.

The easing of pandemic strictures in China should help improve trade and supply chain conditions. However, the Russian invasion of Ukraine remains a major source of supply disruption of energy and agricultural products, key inflation drivers.

The New York Federal Reserve’s Supply Chain Disruption Pressure index shows moderate improvement in May but the general trend remains unusually volatile (Exhibit 2).

Unemployment rates were stable in the United States (3.6%) and the eurozone (6.8%) while falling in Brazil (10.5%), India (7.1%), and China (5.9%).

Metals prices declined in May, notably for aluminum and nickel; the gold price has hovered around $1,830 per ounce in June. Food price inflation reached a high plateau in May and slightly moderated.

Inflation expectations have been rising for several months but eased slightly in June, as indicated by the yield spread in US Treasury products (Exhibit 3).

Equity markets have been volatile as investors react to increasing interest rates and reflect recession fears. A confluence of signals fed into a global equities slide. Between April 20 and June 20, the Dow Jones and S&P 500 indexes have surrendered more than 15% of their value; the Eurostoxx 600 lost 12% during that time, and the FTSE 100 lost 8%. The US dollar has remained strong in May and June, while volatility indexes, especially the equities VIX, remain elevated.

Most central banks are on a tightening course, attempting to control inflation by raising interest rates; the European Central Bank is moving more slowly, however, scheduling a small rate rise for July (Exhibit 4).

At the G7 meeting in June, leaders pledged further support to Kyiv and new sanctions regarding Russia. Meanwhile, policy analysts are warning that the way forward for Europe’s energy supply is not yet clear, given its intention to end dependence on Russian sources. Analysts have also observed that Russian energy exports, including crude oil, natural gas, and coal, are shifting to Asian countries, including India and China.


Instructively, McKinsey’s Global Economics Intelligence (GEI) provides macroeconomic data and analysis of the world economy. Each monthly release includes an executive summary on global critical trends and risks as well as focused insights on the latest national and regional developments.

View the full report for June 2022 here and here. Detailed visualized data is provided in PDF attachments for the global economy and for the United States, the eurozone, China, India, Russia, and Brazil.

ABOUT THE AUTHOR(S)