Articles & stories

Global Inflation Watch: Pick-up in the Second Half of 2015

During the second half of 2015, we expect headline inflation to rebound from very low levels in a number of advanced economies as well as in China and Northern Asia. The common factor is a less favorable base effect from oil prices.

Apart from consumer prices, solid labor markets in the USA, UK and Germany should bring further signs of rising wage growth. In some emerging markets, inflation will likely remain stuck at uncomfortably high levels.

Inflation divergences will likely translate into central bank policy divergence, in our view. The combination of continued growth and a rebound in inflation should lead to rising policy rates in the USA and UK, while central banks in "fragile" emerging markets may need to raise rates further to fight above-target inflation. In contrast, central banks in the Eurozone and much of Asia will likely keep policies expansive, or ease further.

Overall, inflation declined in most developed markets and emerging markets in the first half of 2015 relative to 2014. The decline in oil and food prices reduced headline inflation, while remaining spare capacity in much of the Eurozone and in China added to the disinflation trend. In contrast, in several more "fragile" emerging markets, including Russia, Brazil, Turkey, South Africa and Indonesia, currency depreciation and idiosyncratic factors, such as tariff hikes or unfavorable weather conditions, pushed inflation higher.

Fading Base Effect from Oil Prices

Going forward, we expect the base effect from low oil prices to fade. In a few developed markets (USA, UK and Germany) and emerging markets (Mexico), better economic growth and tightening capacity will add to the rebound in inflation in the second half of 2015. In other developed markets, especially parts of the Eurozone, core inflation should remain very low as the rather moderate pace of the domestic demand recovery implies that spare capacity will stay high.

The same applies to some emerging markets, such as China, where spare capacity should yet remain high. Some large emerging markets, in particular Brazil and Russia, are suffering from weak growth but high inflation due to currency depreciation. For the remainder of the year, we still expect inflation to remain elevated. However, unless currencies see another sharp depreciation going forward, we would expect weakening economic activity and a widening of the output gap to lead to a more visible moderation in inflation as we move into 2016. We thus expect the observed divergence between inflation in emerging markets in Asia and other emerging markets regions to reverse somewhat next year.

Leading DM Central Banks to Launch Rate Hikes

The substantial divergence in inflation is bound to influence central bank policy, and is likely to see the theme of monetary policy divergence play a more central role again. The ongoing US and UK growth recovery, combined with a rebound in inflation, suggests that the US Federal Reserve and the Bank of England will likely begin to raise rates soon. In Japan, the Eurozone, Switzerland, Canada and Australia, central banks will likely retain an easing bias. This also goes for China, Korea and Russia. Central banks in the more fragile emerging markets, such as Brazil, Turkey and South Africa, may need to tighten policy further despite very weak growth, given upside risks from currency depreciation and tariff hikes. In India, policy easing will likely come to a halt.