Navtej Kohli, the founder of Granox Ltd. an oil-and-gas exploration and production firm raises his concern over global inflation, which has hit decade high. Navtej Kohli blog features a piece from the Australia business report.
It comes at a most inconvenient time. The Federal Reserve is sharply cutting US 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.
Consumer prices in the US, Europe and other rich countries are projected to rise 2.6 per cent this year, the highest inflation rate since 1995, the International Monetary Fund says.
In the US, consumer prices in February were 4 per cent above year-ago levels. The 15 countries that share the euro currently see inflation of 3.5 per cent, a decade high and well above the European Central Bank’s preferred range. Even Japan, long plagued by flat or falling prices, is seeing modest inflation.
Rising prices for food, energy and other raw materials account for much of the pick-up in inflation rates. High food and energy costs hit developing countries - where consumers spend a larger share of income on those necessities - particularly hard. In recent weeks, protests over rising costs have shook countries from Vietnam, where prices are up 19.4 per cent from last year, to Egypt.
On Wednesday, the World Bank estimated global food prices had risen 83 per cent 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 per cent this year, the most inflation since 2001 though still well below the double-digit levels of the recent past.
Some of the factors driving inflation vary from country to country: union-negotiated wage hikes in Germany, pork shortages in China, an electricity squeeze in South Africa, pay rises for civil servants in India.
But the fact that inflation is rising almost everywhere suggests some of its causes are global.
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 per cent over the past year. Increasing demand for natural resources among developing economies such as India and China has pushed up prices for raw materials world-wide.
Oil supply constraints have sent crude oil futures surging above $US112 a barrel Wednesday, a new record, resulting in rising fuel and transportation prices.
An increasingly global economy may also be a culprit. Globalisation got some credit for low inflation in recent years: the economic rise of China, India and the former Soviet Union helped expand the global workforce and increase manufacturing capacity, holding down the prices of many goods.
But the economic boom in emerging markets also means their currencies and prices are steadily rising, boosting the prices rich countries pay for imports from those poorer countries.
“Overall, the effects of globalisation have ceased - probably in the long term - to be spontaneously disinflationary,” Christian Noyer, governor of the Bank of France, said last month.
“It’s hard to reverse inflation expectations once they’ve risen,” says Kenneth Rogoff, a Harvard University professor and former chief IMF economist.
For now, rising food and energy prices are inflation’s prime drivers. Core inflation, a measure that excludes volatile food and energy prices, is not rising as quickly as overall inflation.
But commodity price gains are beginning to work their way through the global economy. Even if commodity prices stay where they are, global inflation could continue rising for months to come as companies react to previous price rises.