Slowing activity reduces inflation risks further

We expect headline inflation to fall further below 2% in the coming months, largely due to a renewed decline in oil prices and an associated fall in energy inflation. The previous strength of economic activity has caused some price pressures to emerge, particularly in labour markets. But the global economy is now clearly slowing, implying that any capacity constraints will ease. Indeed, unemployment has already begun to rise in some major economies and wage growth seems to have stabilised. Meanwhile, the previous tentative upward trend in core inflation has stalled. This all suggests that the next move among advanced economy central banks is likely to be to loosen policy rather than to tighten it. In emerging economies, inflation should remain comfortably in line with central bank targets on the whole. But India will be a notable exception because of overly loose monetary policy.