Global Disinflation: Is the Last Mile the Hardest?

Between 2022 and 2024, global inflation fell faster than most economists had anticipated. It peaked at 8.7% globally in 2022, driven by energy price shocks following geopolitical conflict in Europe and supply-chain disruptions that long outlasted the pandemic. Central banks raised rates at the sharpest pace in four decades. By late 2024, headline inflation in advanced economies had fallen to around 2.5 to 3.0%. And then, largely, it stopped declining.

Disinflation means the rate of price increases is slowing — prices are still rising, just less quickly. Deflation means prices are actually falling. A controlled disinflation episode is healthy when managed well. Japan spent two decades fighting deflation — persistent falling prices that discouraged spending and suppressed investment — with severely damaging consequences for growth. The challenge in 2025 is that disinflation has stalled before reaching its destination. Headline CPI in several major economies remains in the 2.5 to 3.5% range — well below 2022 panic highs, but above the 2% targets central banks are publicly committed to.

Two-Speed Inflation: Goods vs Services

The initial price surge was led by goods: energy, food, and manufactured products whose global supply had been disrupted. When supply chains recovered and energy prices moderated, goods inflation fell quickly — in some categories, prices declined on a year-on-year basis.

Services inflation operates differently. Services — healthcare, education, restaurants, transportation, housing — are produced locally, priced locally, and driven primarily by domestic labour costs. When wages rise, service businesses face higher input costs and pass them to consumers. This is not a supply-chain problem that resolves when ships move again. It is a wage-price dynamic that responds only slowly to higher interest rates.

Why Wages Are at the Centre

In most advanced economies, wage growth following the pandemic was exceptionally strong. Workers who had seen real purchasing power eroded by inflation secured above-inflation pay rises. In the United States, nominal wage growth ran above 4% through 2023 and into 2024. Similar patterns emerged across the United Kingdom and several eurozone economies.

For service-sector businesses on thin margins, wage growth of 4 to 5% translates almost directly into equivalent price increases. Breaking this dynamic requires labour market cooling — which means tolerating higher unemployment. That is an outcome no government or central bank pursues willingly, which is precisely why the last mile takes longer.

What the IMF's Data Shows

The IMF's April 2025 World Economic Outlook projects global inflation at 4.3% for 2025, down from the 8.7% peak in 2022. In advanced economies, the IMF forecasts headline inflation averaging 2.1% — close to target in aggregate but with notable variation. The United States is projected at 2.8%, the Euro Area at 2.1%, the United Kingdom at 2.7%, and Japan at 2.3%. Services inflation in several economies remains above 3%.

Emerging markets face a more difficult path. Inflation in emerging market and developing economies is projected to average 5.8% in 2025, with Sub-Saharan Africa running significantly higher. Currency depreciation, domestic food price sensitivity, and weaker central bank credibility make the disinflation path considerably harder outside the advanced economy group.

The Housing Lag: A Measurement Problem

In the United States, shelter costs — rents and the imputed rent for owner-occupied housing — form approximately one-third of the consumer price index and have been among the most persistent contributors to above-target inflation. The CPI shelter component tracks the average of all existing leases, including those signed at lower rates years ago, rather than current market rents. New lease prices have shown moderation for some time, but this feeds into official statistics with a significant lag — meaning real progress in housing costs is being masked by measurement methodology.

Central Bank Communication and Forward Guidance

Beyond setting interest rates, central banks in the last-mile environment must manage expectations carefully. If businesses and workers believe inflation will remain above 2%, they negotiate higher prices and wages — turning that expectation into reality. Central bank forward guidance attempts to anchor expectations at the target, reducing the amount of rate movement needed to achieve the same result.

This is why central bankers remain cautious in their public statements even when data trends look encouraging. Declaring premature victory risks unanchoring inflation expectations — inviting exactly the services and wage spiral that has made the last mile so slow. The Fed, ECB, and Bank of England have all adopted a data-dependent posture in 2025, committing to neither a rate hold nor a cut until each data release confirms the trend holds.

The ECB began easing in June 2024, moving earlier than the Fed as eurozone growth weakened. By early 2025, the ECB had cut rates three times. The Fed remained on hold through most of 2024 and made only modest adjustments in early 2025. This divergence in central bank paths affects currency values, capital flows, and the competitiveness of exporters — adding another dimension to an already-complex global inflation picture.

What to Watch Going Forward

The two most important data points for tracking the last mile are services CPI excluding housing, and nominal wage growth in the non-tradeable sector. If wage growth gradually moderates toward 3% or below without a significant rise in unemployment, the disinflation path remains intact. If wages stay elevated and services businesses continue passing costs through, central banks face an uncomfortable choice.

The IMF's April 2025 outlook also warned that tariff escalation — already pushing goods prices higher in the United States — risks complicating the disinflation path just as it appeared to be settling. A renewed goods price shock layered on still-elevated services inflation would present central banks with their most difficult configuration since 2022.

Monitoring real wage growth — the difference between nominal wages and consumer price inflation — is the most practical guide to where the last mile stands. When real wages are rising but services inflation remains above target, the central bank faces genuine tension between its inflation mandate and its implicit employment mandate. That tension is likely to define monetary policy discourse through 2025 and into 2026.

The Takeaway

Getting inflation from 10% to 4% required raising rates aggressively and holding them high. Getting it from 3% to 2% requires patience, labour market cooling, and time. The last mile is proving the hardest not because central banks have lost their tools, but because the remaining inflation is structural, domestically driven, and deeply entangled with wage and employment conditions that no government wants to deliberately tighten. Central banks in 2025 know the last mile is the hardest — which is why none of them are rushing to declare victory.