Chart of the Week: G4 Inflation Rates to Converge on Central Bank Targets?

At long last inflation is beginning to rise in the advanced economies and it is now above target in the US (2.9%), euro area (2.1%) and UK (2.4%). Looking forward, Fathom expects these headline rates to remain relatively close to target but for varying reasons. In both the US and euro area, the output gap should exert greater upward pressure on prices next year and broadly offset a diminished contribution from energy prices. By contrast, UK inflation is likely to weaken slightly from here and slip below 2.0% by the end of this year as the effects of sterling’s post-Brexit depreciation continue to fade. Of the G4 economies, Japan remains the exception. At 0.7%, headline inflation remains weak, and below the Bank of Japan’s target rate. With growth set to remain subdued, Fathom does not see sufficient momentum building for a sustained pickup in headline inflation for now.

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