Inflation risks shifting to the downside

Price pressures have weakened further against a backdrop of worsening prospects for the global economy. The recent fall in the oil price implies that energy effects will drag on headline inflation in the advanced economies over the coming months. Meanwhile, core inflation seems unlikely to accelerate from a slow pace. While wage gains have been healthy so far, strong productivity growth in the US has prevented this from feeding through to higher inflation. Elsewhere, deteriorating employment intentions suggest that wage growth will stabilise or slow before long. In the emerging economies, the temporary effects of higher food price inflation will give way to a drag from weaker economic activity in time. Central banks seem set to loosen policy across the board. But their ammunition is limited, either by the fact that policy is already very loose or by fears about financial stability. We therefore doubt that they will transform the inflation outlook.