Oil price effect to unwind, but deflation risks persist

Headline inflation looks certain to rebound sharply in most advanced economies during the coming months as the impact of last year’s oil price slump unwinds. Looking further ahead, faster wage growth should push core inflation in the US above the Fed’s 2% target during 2016, but we expect underlying inflation to stay well below central bank targets in Japan and the euro-zone. Some euro-zone countries are likely to experience deflation for several years as they still have high levels of spare capacity and will achieve weak GDP growth, at best. Meanwhile, inflation should pick up in emerging economies, but more gradually than in the developed world. This should bring an end to monetary policy easing cycles in many countries as well as easing fears of deflation in China.