Thứ Năm, 10 tháng 4, 2008

World Inflation To Hit Record High

Another look at inflation from a broader perspective ... interesting.


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World Inflation To Hit Record High

By ANDREW BATSON
Of THE WALL STREET JOURNAL


Inflation is back.

After several years of relative stability, a wave of rising prices is
washing over the world economy.

It comes at a most inconvenient time. The Federal Reserve is sharply
cutting U.S 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 U.S., Europe and other rich countries are
projected to rise 2.6% this year, the highest inflation rate since 1995,
the International Monetary Fund said Wednesday. In the U.S., consumer
prices in February were 4% above year-ago levels. The 15 countries that
share the euro currently see inflation of 3.5%, 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 pickup 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% from last year, to Egypt.

On Wednesday, the World Bank estimated global food prices have risen 83%
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% 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% 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 $112 a barrel Wednesday, a new
record, resulting in rising fuel and transportation prices.

The weakening U.S. dollar is another source. Not only is it pushing up
prices of American imports, it is transmitting inflation to the dozens
of economies that link their currencies to the U.S. dollar, from Saudi
Arabia to Hong Kong to Mongolia. Because of their currency pegs, these
economies are forced to track Fed rate cuts even if they aren't facing
recession. That is putting upward pressure on their prices.
Additionally, years of easy credit earlier this decade -- the result of
a global quest to avoid falling prices, or deflation -- are a
contributing factor.

An increasingly global economy may also be a culprit. Globalization got
some credit for low inflation in recent years: The economic rise of
China, India and the former Soviet Union helped expand the global work
force 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 globalization have ceased -- probably in the
long term -- to be spontaneously disinflationary," Christian Noyer,
governor of the Bank of France, said last month.

Rising prices cut consumer spending power, especially among the poor.
They can also stir bad memories of dislocation caused by previous bouts
of inflation. Fears of inflation, in turn, can spur more of it: If
households and companies come to think of rising prices as normal, that
can create self-fulfilling expectations that keep inflation high.
Inflation clouds the price signals that let market economies function
and makes it harder for businesses to plan.

"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.

The world's largest iron producer, Brazil's Companhia Vale do Rio Doce,
known as Vale, got its customers to agree to a 65% price increase on ore
from its main mine this year, far larger than last year's 9.5% increase.
That led steelmakers like Baosteel Group Corp., China's biggest, to
raise product prices by 17% to 20% in recent months.

"It will have a pretty big effect on our material costs," Jim Owens,
chief executive of Caterpillar Inc., the big U.S. maker of construction
equipment and engines, said on a recent visit to Beijing. Caterpillar is
preparing price increases of up to 5% on its products to take effect by
July.

In St. Louis, Solutia Inc. is raising prices for resins used to make
laminated glass by up to 40%, blaming climbing costs for materials,
energy and transportation. "We are now at a point where sourcing raw
materials at continuously higher prices makes no sense for our business,
unless the effects are passed on," said Solutia Vice President Luc De
Temmerman.

Kimberly-Clark Corp., maker of household goods, began raising prices in
February between 4% and 7% for some paper products, including Huggies
diapers, Cottonelle bath tissue and Viva paper towels. Hershey Foods
Corp. raised the selling price of its chocolate bars 13% in February
after boosting prices between 4% and 5% in April 2007. Hanesbrands Inc.,
which owns the Champion and Hanes apparel lines, has warned that
sustained high cotton prices could filter through to retail prices.

In Temecula, Calif., Gary Byler, owner of Southwest City Coach, has
raised the fares for his four-taxi fleet for the first time in the 10
years he has been in business. His base fare has gone from $1 to $2.50
and the per-mile charge from $2.50 to $2.75. "Insurance costs have gone
up 40%. Fuel prices have doubled," he said.

Just as there is variation in the level of inflation -- from 1% in Japan
to 17% in Latvia -- countries' responses to it vary. Central bankers in
the U.S and the United Kingdom are focusing on the risks of recession,
so they are cutting rates even at the risk of fueling inflation. Others
are attempting to drive inflation down: Central bankers in Australia,
Chile, China, Colombia, Hungary, Poland, Russia, South Africa, Sweden
and Taiwan all have raised interest rates recently.

The trade-off between maintaining growth and fighting inflation is
particularly difficult in Europe, where banks are also under strain and
inflation is picking up. The European Central Bank considers inflation a
bigger worry than the fallout from the U.S. credit crisis. It fears
soaring energy and food prices will spill over into wages and other
prices. So despite persistent money-market tensions, the ECB has refused
to cut rates. It is expected to hold that line in its meeting Thursday.

Germany's recent wage gains are a flash point. Last week, some two
million German public-sector workers won a nearly 8% pay raise over two
years, their biggest settlement in 16 years. In March, some 93,000
German steelworkers won a 5.2% wage hike, while train drivers picked up
an 8% pay increase spread over two years.

In Slovenia on Saturday, some 10,000 protesters from across the
Continent gathered at a conference of central bankers to agitate for
higher wages. They got a cold response. "It would be an enormous mistake
to imitate Germany," ECB president Jean-Claude Trichet told a news
conference afterward, noting recent German wage restraint allowed
workers there some space to catch up.

In the U.S., Fed officials are concerned that food and energy prices
have increased inflation even though the economy is sliding into
recession. But they are generally confident that inflation will recede
as rising unemployment prevents workers from winning wage increases.

Handling social pressures from inflation is tricky. China has raised
minimum wages to moderate inflation's impact on living standards, but
Premier Wen Jiabao has also promised the government will ensure that
average inflation this year won't accelerate past last year's 4.8%.

That's intended to reassure people like Monica Li, a 40-year-old travel
agent in Beijing. She says her daughter's kindergarten just raised its
fees to cover higher costs for lunches. Now Ms. Li is worried that costs
for health care and housing are also headed upward. "It could really be
a problem for us if inflation today, which is mainly in food and other
necessities, leads to a series of chain reactions," Ms. Li says.

Countries have long tried to buy stability by fixing their currencies,
more or less tightly, to the U.S. dollar. Now those decisions are
contributing to inflation in Asia and the Middle East. Central banks in
countries with strict dollar pegs must follow the Fed's rate cuts: If
they don't, investors seeking higher returns would move money to these
countries, placing upward pressure on their currencies and imperiling
their dollar pegs. Hong Kong has mirrored the Fed's recent rate cuts,
igniting the local property market. Housing prices there were up 31%
from a year earlier in January, and rising rents are now feeding
inflation.

Countries that both peg their currencies and export commodities are
experiencing an inflationary double whammy. As nations from the Middle
East to Mongolia earn income from selling resources, rising commodities
prices are stimulating the local economy and feeding inflation.
Meanwhile, these economies are feeling the effects of rising global
prices for food and raw materials. Inflationary pressure is further
heightened as their central banks match Fed rate cuts.

This complicates life even on Mongolia's steppes, where many people are
nomadic herders and food prices tend to fluctuate by season and weather.
The country's currency, the togrog, is unofficially pegged to the U.S.
dollar, boosting prices. As the country's income from copper exports
surged, inflation reached 15.1% at the end of 2007.

Similarly, inflation is stoking instability amid the Middle East's
energy-fed boom. In Qatar, a rich emirate jutting into the Persian Gulf,
surging revenue from natural-gas sales have led to more government
spending. This year's budget is 46% higher than last year's, and more
than four times the spending of just six years ago. Much of that is
going to build highways, airports, infrastructure and schools. Says
Yousef Hussain Kamal, Qatar's finance minister: "The surplus is huge."

So is inflation, at 13.7% on the year in the last quarter of 2007. In
part that's because Qatar followed its currency peg and moved in step
with the Fed's rate cuts. The region's low-paid expatriate work force
was hit hard. While local inflation means higher food and housing costs,
the value of workers' savings -- which they often send home to families
-- is sinking with the dollar. That has triggered strikes and riots in
the United Arab Emirates by construction workers.

Commodity exporters with more flexible currencies have been better at
containing rising prices. Inflation in Canada, a big oil producer, has
been lower than expected, at just 1.8% in February year-on-year. The
central bank attributes that in part to the surge in the Canadian
dollar, up 17% against the U.S. dollar in 2007. Australia, a major
exporter of coal and iron ore, has also seen its currency rise, and its
central bank has been steadily raising rates to cool the economy.
Inflation was 3% in December.

"Australia has done all right because the currency has been quite
strong, and interest rates are high," says Ben Simpfendorfer, an
economist for Royal Bank of Scotland. "The Gulf might have looked more
like Australia if it weren't for the pegs."

Central banks, especially the Fed, are hoping that slowing growth in the
U.S. and Europe will ease inflationary pressures globally, especially
when fast-growing emerging economies begin to feel the slowdown's pain.
Some economists argue that current commodity prices are higher than
underlying demand can justify, and predict they could fall sharply if
speculators retreat and global growth eases. And, at some point, the Fed
will stop cutting U.S. rates, helping arrest the decline in the dollar
and the inflationary side-effects.

"Inflation almost always falls during economic downturns. The Fed has
history on its side," says Julian Jessop, an economist with Capital
Economics in London. He expects inflation to be much lower globally a
year from now, and the new IMF forecast does, too. Nonetheless, he says,
"The outlook for inflation is much more uncertain than it has been for a
while."

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