Inflation to rebound despite latest drop in oil prices

Notwithstanding the renewed slump in oil prices, headline inflation is set to rise sharply in most advanced economies as last year’s much larger falls in energy costs drop out of the annual comparison. In the US, further declines in the unemployment rate are likely to trigger a marked rise in wage growth which should push core inflation above the Fed’s 2% target by mid-2016. Elsewhere, however, there is little risk of inflation taking off. In the euro-zone and Japan, underlying inflation looks set to remain well below target for the foreseeable future. Accordingly, while we expect the US Fed to raise interest rates to 3% or more by the end of 2017, a number of other central banks will probably loosen monetary policy. Meanwhile, inflation is likely to rise in many emerging economies next year, but it should remain low in most countries by historical standards.