Although economic activity has gathered pace this year, and many advanced economies are approaching full employment, there is no evidence of a pick-up in wage inflation. Average earnings growth has remained exceptionally sluggish even in countries such as Germany and Japan, where the unemployment rate is at multi-decade lows, and it has actually fallen in recent months in the US. If anything, the structural changes which have changed the relationship between inflation and spare capacity may have intensified. For the coming two years or so, core inflation will probably remain a little below target in the euro-zone and a long way below target in Japan. Only in the US do we anticipate that core inflation will rise above the central bank’s target on a sustained basis. Against this backdrop, we expect the Fed to raise interest rates four times next year, while low inflation will not stop the ECB from tapering its asset purchases. Meanwhile, the inflation rate in major emerging economies, including Brazil and Russia, looks set to remain near its current multi-year lows.
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