Because central banks’ tools are most effective FIGURE I-2 in bringing down inflation by tamping down Global inflation has been driven by a demand, the decomposition of the drivers of multitude of factors inflation is crucial. By our estimates (Figure I-2), supply and demand factors are evenly contributing Consumer price inflation: . to inflationary pressures. If central banks are to rein in inflation, they will probably have to depress Contribution demand to the extent that a recession becomes to change in . very likely. Figure I-3 outlines our projected headline consumer probabilities of recession along with the likely price inflation forces that tip the economy into recession. . . . . Central Fiscal Stronger than Shelter Energy and bank target stimulus expected strength ood prices COVID rebound Notes: This decomposition of inflation into each of the subcategories is based on subjective analysis of our latest inflation forecast for year-end 2022 compared with expectations at the start of 2021. Shelter inflation is the component that captures the effect of shelter costs in the overall CPI. Shelter includes prices for both renters and homeowners. For renters, shelter inflation measures rent, temporary lodging away from home, and utility payments. For homeowners, the U.S. Bureau of Labor Statistics calculates what it would cost to rent a similar house. Values in the figure reflect rounding. Sources: Vanguard calculations, based on data from Moody’s, Refinitiv, and Bloomberg, as of October 31, 2022. FIGURE I-3 Near-term recession risk is elevated across major developed markets Probability of recession by end of 2023 Drivers/key risks United States 90% • Federal Reserve tightening path • Inflation eroding consumer purchasing power • Ukraine war impact including energy crisis Euro area 90% • Inflation eroding consumer purchasing power • European Central Bank tightening path United Kingdom 90% • Bank of England tightening path • Inflation eroding consumer purchasing power Source: Vanguard, as of September 30, 2022. 9