The average inflation rate in advanced economies is likely to be close to 2% this year and next as the world economy expands steadily and key commodity prices remain fairly stable. Despite weaker CPI numbers recently, the US inflation rate should inch up over the next couple of years as unemployment falls. In contrast, inflation in the UK is set to peak at around 3% later this year and then subside as the effects of last year’s sterling depreciation fade. Meanwhile, we expect underlying inflation to stay a little below target in the euro-zone, where there is still a lot of spare capacity, and a long way below target in Japan, where inflation expectations remain very weak. Against this backdrop, the Fed will probably continue withdrawing its exceptional monetary policy support but other major central banks will be slow to follow suit. Finally, inflation in major emerging economies such as Brazil and Russia has slumped and is set to stay subdued.
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