Deutsche Bank: The global inflation outlook is improving, which justifies normalising monetary policy

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Inflation is bottoming out in the US and Europe and should rise sustainably, going forward, and this justifies starting the process of monetary policy normalisation.

So says Deutsche Bank’s research team who believe the recent stabilisation in commodity and energy prices suggests the outlook for inflation, although low, is “more positive than earlier in the recovery”.

They point to signs of normalisation in wage inflation, gradual in the US, quicker in the UK, supporting expectations for domestic-orientated inflation. Weakness in the euro, as a result of divergent monetary policy settings from the Fed and ECB, should also support price acceleration in the eurozone in their opinion.

Here’s a chart explaining the rationale for their forecasts.

The bank forecasts inflation in the US and eurozone will be 1.5% and 1%, respectively, at the end of this year. Looking ahead, they expect those figures will lift to 1.7% and 1.6% apiece at the end of calendar year 2016.

As a result of the improved inflation outlook Deutsche Bank expects the US Federal Reserve will be the first major central bank to begin normalising policy, most likely in September this year, with the Bank of England joining in during the second quarter next year. They also expect that ECB will end its asset purchase program in net year before potentially raising interest rates in 2017.

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