Friday, April 11, 2008

The ugly face of inflation.

From The Wall Street Journal (subscription may be required):

“The Federal Reserve is sharply cutting U.S interest rates -- the opposite of the usual response to rising inflation -- to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That's making the global response to inflation more complicated.”

“On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years, threatening recent strides in poverty reduction. The IMF forecast consumer prices in emerging and developing countries will rise 7.4% this year, the most inflation since 2001 though still well below the double-digit levels of the recent past.”

“As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year.”

Comment: In another example of how the global economy is intrinsically tied together, we now have the threat of record high global inflation. Every time the Fed makes a move downward on interest rates, countries that have their currency tied to the dollar get a kick up in inflation. Of course, the two primary forces in all of this are food and energy prices. And I do believe that we are moving into an era where these two drivers are going to have a deleterious effect on the world economy for some time to come. As long as the U.S. continues to subsidize corn for use as ethanol and as long as the global energy infrastructure stays in its current modality, we are going to see slightly higher global inflation for some time. In this sense, I disagree with the articles rosy conclusion that an economic slowdown in the U.S. and Europe will quickly stabilize inflation as has previously occurred in history. The IMF also noted that world economic growth has slowed due to the financial crises in the U.S. The theory of a “decoupled” world economy (from the U.S. particularly) seems to hold little value.

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