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Deflation fears likely to ease: NAB

A stabilisation of commodity prices at low levels could be the catalyst for a resurgence of inflation in developed economies, according to the major bank.

A new report by NAB Group Economics said 2016 could finally put deflation fears within developed economies to bed, pointing to International Monetary Fund projections that 2015 (and 2014) saw inflation in developed economies at 20-year lows.

“[Inflation] is also low in Australia, even for tradable goods and services despite more than 20 per cent depreciation of the Australian dollar in trade-weighted terms since February 2012,” NAB said.

“Some of the disinflationary pressure has stemmed from lower oil prices which are likely to be stimulatory to activity in the medium term.”

The report said much will depend on commodity prices in 2016 as well as the degree of spare capacity and aggregate demand across the global economy.

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“We expect commodity prices to stabilise at low levels which should produce higher inflation as fuel price falls in particular drop out of the calculations, and associated input costs stop declining,” it said.

However, any increase in global inflation will be “moderate”, NAB said.

“The global economy is lacklustre, while high unemployment will continue to suppress wages growth,” it said.

“Structural factors – rapid technological change, automation and population ageing – may also act to keep inflation low.”

[Related: Economic recovery faces ‘major risks’]

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