Inflation to plunge...temporarily

The average inflation rate in the G7 is likely to fall to only around 1% next year because of the collapse in oil prices. A growing number of economies will experience a period of outright deflation. However, even if the price of Brent crude remains in the $60-65 per barrel range, inflation should rebound late next year as the earlier decline drops out of the annual comparison. In most cases a few months of very low, or even negative, inflation should not adversely affect economic prospects. But inflation will continue to be uncomfortably low in the euro-zone and it will remain well below the target in Japan. Meanwhile, in many emerging economies lower oil prices are not being fully passed through to consumers. In addition, the slump in the dollar price of oil will be partly offset by weaker emerging market exchange rates.