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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Global Inflationary Pressures: No End in Sight

Economics / Inflation Jul 04, 2008 - 08:53 AM GMT

By: Salman_Khan

Economics Inflationary pressures, coming at a time when there are palpable signs of economic slowdown, has been spooking the global Governments, policymakers, financial authorities and marketmen alike. Worldwide, prices of commodities like Crude Oil, Wheat and Rice have skyrocketed in last one year or so. Policymakers have been especially finding themselves helpless in present situation due to the "global" nature of the current inflation. Central Bankers are also in a fix as given the slowdown in economic activity, they won't be able to fight the inflation the way Volcker did by aggressively raising the interest rates back in 1970's. Stagflation is extremely difficult for conventional policy instruments to deal with, since the attempt to deal with any one of the problems tends to exacerbate the other.


Things are pretty difficult this time as, it is the prices of Crude Oil, which is supposed to have a ripple effect on prices of almost everything which concerns our life, is seen as stoking the inflation. The spike in oil prices, which hit $146 per barrel in recent days, has pushed up fertilizer prices, as well as the cost of trucking food from farms to local markets and shipping it abroad. Then there is climate change. Harvests have been seriously disrupted by freak weather, including prolonged droughts in Australia and southern Africa , floods in West Africa , and this past winter's deep frost in China and record-breaking warmth in northern Europe .

The push to produce biofuel as an alternative to hydrocarbons is further straining food supplies, especially in the U.S. , where generous subsidies for ethanol have lured thousands of farmers away from growing crops for food. Not only those countries who are importing Crude Oil but the Oil producers like Venezuela , Saudi Arabia and Russia are also witnessing price pressures as their economies are flushed with money coming from Crude Oil sales. Recently, US President George W. Bush and Secretary of State Condoleezza Rice even went on to the extent of blaming the rising middle class (and their consumption) of China and India as the main reason behind the rising commodity prices.

Price pressures across the world are reaching levels that may soon threaten economic, political and social stability. Inflation rates have reached: Venezuela (22%), Vietnam (21%), Latvia (18%), Qatar (17%), Pakistan (17%), Egypt (16%) Bulgaria (15%), The Emirates (11%), Estonia (11%), Turkey (9.7%), Indonesia (9%) Saudi Arabia (9.6%), Argentina (8.9%), Romania (8.6%), China (8.5%), Philippines (8.3%), India (11.67%), Eurozone (3.6%), US (3.9%). Food prices have doubled in three years, according to the World Bank, sparking riots in Egypt and Haiti and in many African nations. Brazil , Vietnam , India and Egypt have all imposed food export restrictions which are only expected to aggravate problems further. Rising food prices threaten a surge in violent protests across the world, the Red Cross has warned.

Thus, the key to rein in current level of international inflation lies in taming the Crude Oil prices which are ruling quite near the 150$ mark. Increasingly, a consensus has been emerging the world over that the current bubble formation in commodities is a fallout of Ben Bernanke's aggreesive move of slashing interest rate to counter losses arising from subprime crisis. Histroy testifies to the fact that in recent times, a number of bubbles have formed due to the actions of Central Bankers. The most striking example is the Housing Bubble of US,( that roughly began in 2001) that was a product of Alan Greenspan's move of keeping interest rate low in order to counter the recently busted IT bubble (1995-2001). The bubble finally got pricked in 2005-2006, and the sector, which then went into a slump, is yet to recover from it. Any type of economic bubble is difficult to identify except in hindsight, after the crash.

There are indications that we are soon going to see a coordinated intervention in the foreign exchange market by the leading Central Bankers of the world. Ben Bernanke has recently given indications that he has done with slashing of interest rate and may now think of raising the same. ECB's Trichet has already made his mind to go ahead with raising the interest rate. Already, China , India , Malaysia , Indonesia are following tight monetary policy since last few months. Above all, economies like India, Malaysia, Indonesia and Taiwan have gone ahead with reducing the government subsiddies on petroleum products and have raised the prices of fuel to check the artificial demand of Crude Oil. What effect all these steps will have on the international Crude Oil prices is something which will remain an enigma atleast for some time to come.

By Salman Khan
Salmanspeaks.co.nr

Salman Khan is a Commodity Analyst working with a leading Delhi based Indian brokerage firm, Mansukh Securities and Finace Limited as Research Analyst in Commodities. He has a rich experience of tracking Energy, Precious Metals, Base Metals and Agri Complex for last 2 yeas across various International and Indian commodity bourses (NYMEX, COMEX, LME,  CBOT, SHFE, MCX and NCDEX. He is a voracious reader and a prolific writer. He is the inhouse editor of monthly journal "MAKE MORE GUIDE" published by Mansukh Securities and Finance Limited . His articles have also appeared in leadind portals like seekingalpha.com , youthejournalist.com and youcantrade.in . He also blogs regularly at his personal blog salmanspeaks.co.nr .

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