How will deflation affect the outlook for monetary policy?

Headline inflation is set to be well below zero for the bulk of this year in many advanced economies, including the US and the euro-zone, and we think it will probably dip below zero in the UK and Japan. For the US and UK, this is good news as its main effect will be to boost real consumption and GDP. Accordingly, the Fed and Bank of England are likely to “look through” a period of deflation and begin raising rates. But in the euro-zone and Japan, deflation may be more persistent and damaging and will put additional pressure on the ECB and BoJ to further loosen monetary policy.