Fragile demand to keep underlying inflation subdued

Over the next few months, inflation will be dominated by oil price effects as the previous slump unwinds and headline rates rise from their current lows. Some components of core inflation, such as airfares and restaurants, could recover lost ground as containment measures ease. But in general, the impact of weak demand will dominate. It will be some time before world GDP reaches its pre-virus path and incomes are set to suffer as government job retention schemes and other support measures are wound down. Central banks’ generous support measures are more likely to put a floor under inflation than to boost it significantly, at least over the next couple of years. In all, we now expect core inflation to be somewhat weaker than we anticipated before the virus and see headline rates settling below central banks’ targets.