Lower oil prices helped bring inflation down to zero in the Euro area in May. Bond markets have in the past couple of weeks begun to anticipate some inflation growth in the US over the next two years, and the ECB and various commentators are voicing confidence that the region will return to inflation by the end of the year, after a brief deflationary period.
What role might oil prices play in inflation rates over the next few months? It’s a question that has been concerning many market watchers in recent weeks, particularly those who worry that the very low official interest rates and quantitative easing measures being taken in the world’s biggest economies could lead to high inflation in the future; or that oil prices are not reflecting a fundamental increase in demand but rather the effect of restocking. Reuters yesterday wrote about ‘alarm’ over the inflationary effect of the oil surge, as inflation expectations returned to the bond market in the past two weeks after a prolonged absence, following the sharp rise in crude prices in the past month.



