Strategy: Higher inflation to push up inflation expectations further
|This week we highlighted that we think global inflation is set to surprise on the upside due to the recent rise in commodity prices. Our forecast is for higher commodity prices, but even if we assume an unchanged oil price, it indicates that global G3 inflation could rise towards 2.0% from the current level of 0.4% (see bottom-left chart). We expect this to reduce the deflation scare further, thereby supporting the market pricing of inflation. However, since higher global inflation may not be persistent, as it is driven by volatile commodity prices, we expect central banks to see through higher inflation and stay accommodative. This could be positive for long-term inflation expectations as well, as it would be a sign to the markets that the central banks take their remits seriously.
In the euro area, we expect inflation to reach 1.5% early next year, which will be the highest since mid-2013. While the market has started to price higher near-term inflation, longerdated inflation is still priced very subdued. Our 2017 forecast is much above the current pricing (see bottom-right chart) and in our view the risk of upside inflation surprises is underpriced as long-term euro inflation pricing is affected by spot inflation. Higher inflation expectations will of course be welcomed by the ECB but we expect the ECB to maintain an accommodative monetary policy until it sees a convincing upward trend in underlying inflation. A majority of the ECB members, including ECB president Draghi, has seemed eager to kill the recent tapering rumours.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.