We’ve said it before, and so have others. Now Martin Wolf says it, and far better than yours truly ever could. The U.S., along with the developed economies generally are importing inflation. It’s time to act.
This is not solely a task for the Federal Reserve, writes Wolf in today’s Financial Times. Monetary policy here, and abroad, needs to tighten, he advises. But there’s precious little of that at the moment, and the risk is that global inflation, already bubbling, will take root and become a bigger threat down the road.
The warning signs have been flashing for some time, Wolf reminds, starting with the multi-year bull market in commodities. This is not the result of manipulation by traders; it’s the reflection of a fundamental shift in the supply/demand equation in the global economy.
The “continuous rise in the relative price of commodities is a symptom of an inflationary process,” Wolf writes. “Whenever excess demand hits, the goods whose prices rise first are ones with flexible prices, of which commodities are the prime example. Commodity prices then are a pressure gauge. If we look at what has been happening in recent years, the gauge is showing red.”
The only question, then, is what to do? Ideally, China, India and the emerging markets generally will recognize that their Bretton Woods II strategy–keeping their currencies undervalued relative to the dollar–is contributing to the global imbalances that are fueling inflationary pressures. It’s time to unwind, or at least downshift the strategy that has been so popular in the 21st century.