Global inflation: Global inflation is set to present policymakers with a cruel dilemma. After falling early in 2009, prices in many countries have resumed rising. The 1.8 per cent November rise in the US producer price index (PPI) is only the latest example of this. The need to squash rising inflation could soon force central banks to risk sacrificing growth.
The increase in the US PPI surpassed expectations, putting the index, which measures the prices of finished goods, squarely in positive territory year-on-year despite last winter’s big slide. Globally, inflation appears somewhat synchronized with the strength of local currencies. Thus Japanese consumer prices have declined by 2.6 per cent over the past year as the yen has performed strongly relative to other major currencies. Prices in the euro zone rose over the year to November after recording several months of year-on-year decline. British prices also jumped in November.
Among the biggest emerging markets, only China is still experiencing year-on-year deflation, but money supply growth of 30 per cent in the year to November by the M2 measure suggests that may soon change. Brazil’s inflation is running at a moderate 4.2 per cent annually, but price increases in both Russia and India are around double-digit levels.
The reappearance of inflation in many global markets owes much to commodity prices, which are up 39 per cent this year in dollar terms or 26 per cent adjusted for the dollar’s trade-weighted decline. As the world economy recovers, commodities are likely to continue rising as long as interest rates stay low.
The danger is that economic recovery could also lead wages to start rising again, meaning surging commodity prices would no longer be offset by falling labour costs. If interest rates remained low, that would make global monetary policy even more expansionary in real terms than it is already, further stoking already hot commodity prices - and potentially pushing consumer prices up sharply.
But if central bankers decided to take on inflation by raising interest rates, that would risk pushing the global economy into the second leg of a double-dip recession. A few central bankers might balance it just right - but the betting has to be on some policy blunders, as well.