Inflation won't start roaring ahead but expect an imminent increase

OVER the course of the past few months, financial markets seem to have become caught up in a disinflation mentality. Disinflation is when the rate of inflation declines - and at current inflation levels disinflation would very quickly become outright deflation, which is when the rate of inflation is negative. Fortunately for the world economy, this is very unlikely to happen. We are not in a disinflation world. We are in a relatively low inflation world, but that is a very different situation.

Why are economists so relaxed about the risks of deflation? Economists are relaxed because the current very low levels of inflation are almost entirely caused by the slump in oil prices that took place between October 2014 and January 2015. Oil prices have remained at very low levels since then. This means that in September 2015, an inflation rate would be comparing very low oil prices with the pre-slump oil prices of September 2014 - and of course the change in oil prices would have been a substantial negative.

From October 2015 onwards, however, we will be comparing post-slump oil prices with post-slump oil prices. This means that means oil, currently dragging consumer price inflation down like a lead weight, will cease to be a negative influence on inflation. It is not likely to be a strong positive force for inflation, but simply removing the negative influence is enough.