Inflation to bounce back, but remain low

Many advanced economies will experience several months of negative headline inflation this year as a result of the plunge in oil prices, but few are at risk of a prolonged or damaging bout of deflation. In the US and UK, where economic growth should remain high, inflation is set to rebound towards central bank targets during 2016 as the fall in oil prices drops out of the annual inflation rate. But very low inflation, or outright deflation, is likely to be more persistent in much of continental Europe and may well return in Japan. Meanwhile, fears of deflation in emerging economies look misplaced. The aggregate price level is unlikely to fall in many emerging economies, and in any case a period of deflation should not be a problem provided nominal GDP growth remains strong.