Inflation set to rebound

An increase in headline inflation is now “baked in the cake” for most economies. The effects of last year’s oil price slump are set to drop out of the annual comparison in the coming months and fears that a hard landing in China will tip the world economy into a damaging period of deflation look misplaced. However, core inflation should remain very low in most advanced economies, including the euro-zone and Japan, and fairly low in emerging economies, too. Several central banks, including the ECB, the BoJ and the People’s Bank of China, are therefore likely to loosen policy again in the coming months. The key exception is the US, where we expect both headline and core inflation to exceed the Fed’s 2% target by early 2016 and to rise steadily thereafter. This should prompt the Fed to tighten policy more than anticipated next year.