Inflation Will Return to 2% Next Year

By the first half of 2016 the collapse in energy prices will be falling out of the year on year numbers and headline CPI inflation will trend back towards 2%

Andy Brunner 21 October, 2015 | 4:00PM

With the recent steep price declines for energy products and other commodities, headline inflation is generally set to remain below or close to zero in many countries during the autumn. Forecasts rightly assume, however, that by the first half of 2016 the collapse in energy prices will be falling out of the year on year numbers and headline CPI inflation will trend back towards 2%, at least in the US and UK.

Core inflation, of course, continues to provide the clearer underlying picture of inflation trends and as yet, there is little evidence of significant enough reflation to reignite inflation to a level discomforting to central banks.

Interest Rates & Monetary Policy

Short term money market rates generally trended sideways but with US rates out along the curve easing back following the Fed’s decision to maintain current rates. The US Federal Reserve widened its reaction function adding global growth and financial market turmoil to domestic growth and inflation developments. At the moment, observers are tending towards a Q1 hike but an equity bull market, stronger growth in China and a recovery in commodity prices and emerging market bond yields and currencies, could do wonders for December’s chances.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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