Prolonged exceptionally low inflation or deflation in much of Europe or Japan remains a threat despite the recovery in oil prices, according to Capital Economics.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Its report, "Has the threat of deflation passed already?", noted that the plummeting price of oil in the second half of 2014 and early this year had already caused widespread deflation across the world.
"By February, inflation was below 1 per cent in nearly half of the 90 economies we track, and it was already negative in a third of them," said the report.
The 40 per cent increase in the price of crude oil, the success of European quantitative easing, and inflationary pressures in the US had all eased the fear of deflation, said Capital. But it was "too soon to sound the all-clear" and the risk of very low inflation or outright deflation "remains very significant in several advanced economies".
Australia was not at risk of deflation despite price rises slowing to multi-year lows, said Commsec economist Savanth Sebastian.
"The impact of lower oil prices has been the biggest driver of low inflation," he said.
"While we're not going to have excessive wages growth, we're going to have modest wages growth and on top of that you're seeing a lift in prices across an array of sectors including housing and construction," he said.
"That's going to ensure that inflation remains comfortable – certainly not excessive. I don't think we're at any risk of a deflationary environment."
Commsec's forecasts for headline inflation were 2 per cent for December 2015 and 3 per cent for December 2016, with underlying inflation of 2.7 per cent tipped for December 2015 and 3 per cent for December 2016.
The chief concern was Europe, said Capital. Headline inflation would pick up throughout the eurozone in 2015 but fall back in 2016. In the southern eurozone economies, there will still be deflation.
"Although the average inflation in the 19 eurozone countries should be positive next year, the inflation rate may remain below zero in the highly indebted southern countries."
In the better-performing northern countries of Europe, meanwhile, Switzerland was the only one that would suffer deflation. The UK – and also the US – would enjoy inflation around 2 per cent.
Japan also remained at risk of deflation, even though inflation there was 2 per cent in February, said Capital.
If the impact of the 2014 sales tax hike was removed, Japanese inflation would only be slightly above zero. Consequently deflation is coming – headline inflation is likely to fall below zero in April, said Capital.
However, deflation would not last, due to increasing oil prices and the depreciating yen. "Our forecast is for Japan's inflation rate to pick up again later this year ... but we suspect that inflation will not return to the Bank of Japan's 2 per cent inflation target within the next couple of years."
Societe Generale had a more upbeat analysis of the world's deflation situation, but was also bearish on Europe and Japan. "Taking a few snapshots, our sense is that the inflation data is slowly bottoming out," said SG, citing a lift in oil prices to $US65 a barrel by the December quarter of 2015 plus stronger economic growth.
"The indicators are now stabilising for the 2015 outlook. There is even the odd up-tick. Encouragingly, however, for 2016 the outlook is constructive, albeit still well below target in both the euro area and Japan."
