Low inflation scenario likely to remain for longer period of time globally

Low inflation scenario is expected to remain for a longer period globally, given the subdued demand. According to a Morgan Stanley research note, the slight movement upward in global inflation to 2.7 percent next year from anticipated 2.5 percent this year, is nearly due to easier base of comparison because of oil price collapse earlier in 2015-16.

Given the wider output gap and slower growth, core inflation in G3- euro area, US and Japan, is likely to remain weak at about 1.3 percent, much lower than their central banks’ target during the forecast horizon, noted Morgan Stanley.

Furthermore, given that the major part of emerging markets continues to face huge output gaps and disinflationary pressures, these pressures are expected to transmit to developed markets, dragging on goods inflation. The persistent weakening of Chinese yuan is likely to signify that the nation would continue to transmit disinflationary pressures to other countries globally. In the UK, import prices, and consequently CPI, are likely to be pushed higher by the sharp depreciation of the GBP next year, stated Morgan Stanley.

In the emerging markets, disinflationary pressures are likely to continue in the forecast horizon. The headline CPI inflation is expected to slow in emerging markets in 2016 as well as in 2017. Especially, higher inflation rates are reversing for commodity exporters as their currencies and terms of trade are stabilizing, noted Morgan Stanley.

The wide output gaps and slack signify that disinflationary pressures are expected to continue in spite of a rebound in emerging market growth.

Meanwhile, China continues to face the problem of excess capacity, which is keeping  producer prices in deflation and is passing on to more generalized disinflationary pressures. India’s inflation drivers such as wage costs, commodity prices, property prices and fiscal consolidation are expected to remain benign.

In the mean time, subdued domestic demand and tight monetary policy in Russia and Brazil are expected to keep inflationary pressures at bay, added Morgan Stanley.