Inflation seems to be bubbling again in the U.S., but not enough to convince everyone that the pricing cat’s out of the bag. But if it’s still easy to dismiss America’s uptick in pricing pressures, the task becomes tougher when considered globally.
As inflationary sightings around the world rise, the probability also increases that the general trend reflects something more than a statistical anomaly of limited relevance. The reasoning unfolds as follows: Inflation is primarily if not wholly a byproduct of monetary mismanagement. Meanwhile, there are many central banks operating on the planet, and many operate independently of their counterparts. The evidence is found in the fact that rates of inflation and money supply growth and interest rates vary. No one would confuse the state of monetary affairs in Japan, for instance, with that of the U.S. Japan has a number of economic challenges, but rising inflation isn’t one of them. The U.S., by contrast, seems to be looking at a more challenging inflationary scenario. To the extent that such differences apply, the source of the praise or disapproval frequently lies with the local central bank.
Of course, globalization has dimmed the power of central banks compared to the past. But the loss of sway over prices is far from absolute. Central banks still matter, which is to say they continue to wield enormous influence over prices in the long run. Accordingly, central banks, if they’re so inclined, can unleash the forces of higher or lower inflation.
A quick digression: we’re defining inflation as price increases due to something other than shifts in supply and demand. If the price of widgets rises because several widget factories burn down, that’s not inflation as we’re defining it here. Similarly, if widget prices fall because some clever company devises a more-efficient process for manufacturing widgets, that’s not deflation, at least not a deflation engineered by a central bank. On the surface, the average consumer may not recognize the difference, but in macroeconomic and monetary terms the distinction matters a great deal.
With that in mind, we note that inflationary flare-ups, albeit still mild, are popping up around the globe lately. Among some recent examples:
* Australia’s core inflation is running at “16-year highs.” –Wall Street Journal, February 25, 2008
* “In Saudi Arabia, where inflation had been virtually zero for a decade, it recently reached an official level of 6.5 percent, though unofficial estimates put it much higher. Public protests and boycotts have followed, and 19 prominent clerics posted an unusual statement on the Internet in December warning of a crisis that would cause “theft, cheating, armed robbery and resentment between rich and poor.” — New York Times, February 25, 2008
* “Euro-zone inflation may be more robust than the European Central Bank expected at the end of last year but this is a ‘temporary phenomenon’ linked to high food and energy prices, ECB Executive Board member Juergen Stark told a German magazine.
‘We are highly dissatisfied with the current inflation rate. But it is a temporary phenomenon, caused by a strong rise in food and energy prices,’ Stark told WirtschaftsWoche in an interview.” –Reuters via Guardian.co.uk, February 23, 2008
* “China’s consumer price index (CPI), the main gauge of inflation, retouched an 11-year monthly high with a 7.1-percent rise in January .” –Xinhua via ChinaDaily.com, February 25, 2008
And, of course, the U.S. inflation appears to be marching higher again, too, as we noted last week.
Perhaps all the inflationary bubbling will fade under the weight of an economic slowdown that’s widely expected in the U.S. and Europe. A number of central banks are forecasting just that, and for good reason. If a slowing economy takes the edge off inflationary pressures, the cycle will do the heavy monetary lifting for central bankers, who will be free to focus their monetary efforts on juicing growth.
But stagflation–slowing economic growth and rising inflation–can’t be ruled out just yet. Indeed, Federal Reserve policymakers seem to be expecting a touch of stagflation in the foreseeable future. According to minutes from the Fed’s policy meeting in January, policy makers raised their predictions for inflation and lowered their forecasts for growth. “The central tendency of participants’ projections for real GDP growth in 2008, at 1.3 to 2.0 percent, was considerably lower than the central tendency of the projections provided in conjunction with the October FOMC meeting, which was 1.8 to 2.5 percent,” according to the minutes. Meanwhile, “The central tendency of participants’ projections for core PCE inflation in 2008 was 2.0 to 2.2 percent, up from the 1.7 to 1.9 percent central tendency in October.”
To be fair, inflation generally in the global economy is still low by historical standards, at least as measured by official statistics. But it’s not the absolute level that concerns us; it’s the trend, and the trend is up. What’s more, the upward trend didn’t drop out of left field; it’s the byproduct, in our view, of the easy money policies that have swept the globe earlier in this century, a trend aided and abetted by one central bank at a time. The hope is that slowing economies will save the day. We’ll see. If not, a more hawkish monetary policy is the last defense, assuming it’s deployed.
No, we don’t know the outcome, but at least we’re reasonably conversant in the rules of the game.