The inflation rates in some key countries across the globe are now touching double digits: Russia is at 11.9%, Saudi Arabia is at 9% and Argentina is at 8.2%. In Saudi Arabia, where inflation had been nearly zero for a decade, the effect of high inflation on food prices and other household expenditure has fragmented society as public protests and boycotts mount. 19 prominent Saudi Clerics posted an unusual statement on the Internet in December warning of an inflation crisis that would cause "theft, cheating, armed robbery and resentment between rich and poor." Inflation has also been a factor in some recent clashes that have been seen as political or sectarian. A confrontation in Beirut between Lebanese Army soldiers and a group of Shi'ite protesters that left seven people dead started with demonstrations over power cuts and rising bread prices.

Inflation has many causes, from rising global demand for commodities and food-products to the monetary constraints of currencies pegged to the weakening American dollar. But one major cause is the skyrocketing price of oil itself, which has quadrupled since 2002. It is helping push many ordinary people across the world towards poverty even as it stimulates a new surge of economic growth in a few oil rich countries and adds to the slow down in growth in mature industrial economies reeling from the effects of the unfolding global credit crunch.

As the cost of basic commodities soars, the United Nations has stated that it may have to cut food aid to the world's poor and has warned that the middle class constitutes a "new area of hunger" in developing countries. "Our ability to reach people is going down just as the needs go up," said Josette Sheeran, executive director of the World Food Program. Because prices for wheat, corn, rice, soybeans, cooking oil and other staples have risen dramatically, "We are seeing a new face of hunger in which people are being priced out of the food market," she added. Emerging economies tend generally to spend a greater proportion of their income on energy and food, both of which have been soaring in price in the last year. The news therefore, that wheat prices rose by the largest amount in more than five years to over USD 12 per bushel is not going to help matters. This huge rise is driven by investors realising that supply is not keeping up with demand in agriculture and there is a growing element of speculation. The UN estimates that poor countries will pay 35% more for cereal imports this year, even as they purchase less.

In 2006, in China their inflation was only 1.5%. It is now officially 7.1%, the highest in more than 11 years. China's central bank raised interest rates six times last year and pushed the reserve requirement rates to a two-decade high to curb liquidity with little success. The yuan has risen 2.1% against the US dollar since the start of this year, following a 6.9% gain in 2007 and more than 13% since July 2005. The yuan is expected to reach more highs against the US dollar this year as China is left with few choices to curb inflation. Singapore's inflation at 6.6% has reached a 25-year high in January, with housing and food costs rising much faster than analysts predicted. The data were the latest in a series of rising price figures that have prompted the government to raise its 2008 inflation forecast, creating a greater need for tight monetary policy.

In the US, consumer prices, producer prices, and import prices are all signalling the erosion of purchasing power. During the 12 months ending in January, consumer prices are up 4.3% -- and more significantly 6.8% at an annual rate in the past three months, the fastest three-month increase since 1990 (excluding the immediate aftermath of Hurricanes Katrina and Rita). Import prices are up 13.7% versus last year, the largest increase on record going back to the 1980s. Most of the increase is due to oil prices but even excluding petroleum, import prices are up 3.6% versus last year. This may not seem like much, but back in the late 1990s and early 2000s, non-oil import prices were falling, leading many to suggest that the US was importing deflation from abroad. These statistics are ignored by many decision makers because home prices are falling. But this decline reflects a lowered (or negative) rate of return on residential land and structures, not the rental cost associated with housing. Although home prices have fallen in the past year, rent, food and fuel costs have continued to put upward pressure on the cost of living.

The US Federal Reserve has joined the ranks of those unconcerned about inflation. Despite the data, and significant interest rate cuts, the last two statements issued by the Fed to accompany their interest rate decisions have completely omitted "price stability" as a policy goal. This is a reversal of the 1990s, when the Fed consistently argued that maximising economic growth over the long-run required price stability. The idea was that if the Fed focused on price stability, both low inflation and higher long-term economic growth would be the result. This stance reflected the lessons of the 1980s when Paul Volcker used Fed policy to fight inflation and Ronald Reagan cut tax rates in an effort to free the economy. These policies reversed those that created stagflation -- stagnation and inflation.

Unfortunately, some major central banks are implementing policies to cut interest rates in an attempt to boost economic activity and at the same time politicians are discussing how much to raise tax rates to shore up public sector borrowing requirements. The fact that there is denial that inflation is on the rise does not help at all. This was one of the key ingredients of bad policy in the 1970s -- denial that there was a problem! This cannot last forever. Eventually, inflation will not, cannot and must not be ignored and that time of reckoning seems to be getting closer and closer.

[ENDS]

To reflect further on this, please click here and read views as well as respond directly within the online forum.

We welcome your thoughts, observations and views. Thank you.

With love and warm wishes to you and family


DK with family

DK Matai

The Philanthropia, mi2g.net

DK's online community participation includes:

Open ATCA, IntentBlog, Holistic Quantum Relativity Group, LinkedIn, Facebook, Ecademy, Xing, Spock, A&B Blog and QDOS. [Profile in pdf]

Add to Technorati Favorites

Thanks for signing in, . Now you can comment. (sign out)