Measures of underlying inflation remain rather muted, having moved largely sideways over recent months. At the same time, inflation dynamics are supported by strengthening labour cost pressures amid high levels of capacity utilisation and tightening labour markets. In fact, recent data on negotiated wages point towards a continuation in the upward trend in wage growth, which is expected to gradually push up underlying inflation.
Market based measures of long term inflation expectations have further declined, while surveybased measures have remained stable. The probability of deflation implied by options markets remains low and continues to suggest that deflation risks remain contained. Yet, market-based measures of inflation expectations point to a prolonged period or low inflation, indicating only a very gradual return to levels close to, but below 2%.