The low rate of headline inflation is driven by the high exchange rate, low global inflation, and falling oil prices. Inflation in the tradables sector has been negative for much of the past 2½ years and remains very weak. Our pricing models point to further declines in headline inflation over the coming year as a direct result of this weakness in traded goods prices.
If economies were able to achieve a major rebalancing of global demand from deficit to surplus countries, while allowing for a full and sustainable recovery of world economic growth, exchange rates would probably have to move as well, reflecting such structural adjustments.