Global Inflation: US stimulus and closing output gaps pose upside risk – Danske Bank

Analysts at Danske Bank suggest that in their base case they forecast that global inflation will rise gradually from very subdued levels.

Key Quotes

“Looking at different factors such as fiscal and monetary policies, output gaps, oil prices and China/emerging market factors, we believe the balance of risks to global inflation relative to our forecasts and market expectations is on the upside.”

“The combination of the significant US fiscal boost at a time when output gaps are closing poses upside risks to global inflation, as we do not expect central banks to offset this by tightening monetary policy aggressively. Moreover, risks to oil prices are skewed on the upside, which could have a significant impact on inflation.”

“Moreover, the advanced stage of the business cycle in many emerging markets and higher commodity prices imply that emerging market inflation is likely to rise over coming years. However, we believe the reflationary force from China seen in 2017 is likely to ease as credit tightens and the housing market slows. In addition, different indicators suggest that global monetary policy is turning neither more nor less accommodative.”

“In sum, we see the balance of risk to global inflation skewed to the upside, particularly in 2019, as fiscal expansion and closing output gaps should drive higher core inflation.”