Global economy: Is deflation or inflation the threat? The two forces are battling it out in a global economy still torn between depressed developed economies and booming China, India and emerging Asia.
The U.S. Federal Reserve's Federal Open Market Committee will have the deflationary threat in mind when it deliberates today. The Fed interest rate is practically zero but growth is weak and the inflation rate just 1.2 percent. Markets are half expecting a hint at more money printing. That is why the gold price has hit new highs and the dollar has been soft. The more the Fed and other central banks print money, the greater the appeal of shiny metal that can't be made by man. The same goes for commodities rather than low-yielding financial assets.
But while developed economies continue to reel from burst housing bubbles, elsewhere in the world different forces prevail. Last week India raised interest rates yet again to counter inflation of 11.3 percent. Food supply problems are part of the reason. But fast growth, of about 8 percent, is also pushing up prices.
Minutes out today from Australia's central bank suggest another rate rise will soon be made.
The Royal Bank of Australia said a mining investment boom, fuelled by demand in China, could force up inflation in an economy likely to grow above trend.
The divergence between Asian strength and developed country weakness is being reflected in important exchange rate moves. Asian currencies generally are on a rising trend. The United States is pressing harder than ever for China to let the yuan rise – and recently China is cooperating. With high growth and appreciating currencies, emerging Asia should import more, helping the west out of its slump.
Asia’s remarkable dynamism and very low western interest rates make it most likely that deflation is averted and the west’s recovery continues in 2011. But Asian inflation does carry a threat, one the UK may already illustrate. UK prices are rising twice as fast as wages. Stagflation may be the risk in western economies that catch Asia’s inflation and not its dynamism.
There still remains, too, the deflationary risk: that the struggling west doesn’t revive and even drags emerging Asia down. The Fed and other western central banks won’t court that. Rates will stay low. More money printing is possible.