Rebound in inflation is almost over

Headline inflation is now above the target in the US and close to it in the euro-zone and UK. We expect the average inflation rate in advanced economies to be fairly stable at around 2-2½% for the next two years or so. However, underlying inflation rates are likely to diverge. In the US, price pressures will continue to build as labour market conditions tighten, and in the UK the inflation rate will probably remain high for some time because of the lingering effects of last year’s slump in sterling. In contrast, underlying inflation in the euro-zone and Japan will stay well below the ECB and Bank of Japan’s targets. Finally, inflation in most emerging economies is set to stay quite subdued, while in Brazil and Russia it will continue falling sharply this year. The rebound in energy prices has already pushed inflation in the OECD above 2%. Barring another major rally in oil prices, inflation is likely to average between 2- 2½% in advanced economies over the coming year or two. But this masks a divergence between the US, where underlying inflation should continue to accelerate, and the eurozone and Japan, where core inflation is set to remain closer to 1%.