Inflation returns
Economic downturn has coincided with rising prices. Have policymakers been too optimistic, asks John Plender
news.ft.com
Published: June 18 2001 18:29GMT | Last Updated: June 18 2001 18:40GMT
The past decade has not been kind to inflation hawks. But with attention in global markets switching from lower growth to accelerating inflation, rehabilitation may at last be on the cards. Are the hawks like the broken clock that tells the right time once every 12 hours? Or do they have a point?
With rising oil and food prices providing much of the impetus for the inflationary upturn, there is certainly a hint of 1970s stagflation in the air. But the global economy is not moving in sync, as it did in the 1970s. The US, Europe and Japan are experiencing cycles that are very different both in timing and in character.
The US economy is at the end of a 19th-century-style investment boom dominated by technology and telecommunications, which has been followed by excess supply and a sharp inventory adjustment. Yet the marked deceleration in the economy has been accompanied by robust inflation numbers. Consumer prices in May rose by a larger- than-expected 0.4 per cent, following 0.3 per cent in April. Though the core consumer price index, excluding food and energy, slowed in May, it had risen strongly in the first four months of the year. Household spending has been buoyant in spite of a wayward stock market, rising unemployment and rising debt levels.
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Against that background it is hard to believe the world faces anything like the inflationary shock of the 1970s. The starting-point is more favourable. Last year in the industrial countries the increase in the gross domestic product deflator, the broadest measure of inflation, was a mere 1.25 per cent. But it is just possible that the rate of inflation is now being underestimated, after a long period in which forecasts of inflation were too high. It is worth exploring what assumptions went wrong and why.
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In the end, the key to the inflationary prospect lies in monetary policy. If the US Federal Reserve's aggressive interest rate cuts succeed in generating a strong recovery there may be an inflationary shock, which will reverberate across the world, especially if it prompts a dollar collapse. But the reality for the moment is curiously lopsided.
There is no perceptible inflation in business in the US, where profits are under extreme pressure. Much the same is true, if less painfully so, in Europe and Asia. Yet consumers, most notably in the English-speaking economies, are in fine fettle. Monetary policy is egging them on.
So an inflationary blip cannot be ruled out, especially in the US, where the six-monthly annualised rate of growth in broad money is at more than 15 per cent. A strong economic recovery might turn that into something worse. That looks at best possible rather than probable. But the inflation hawks will feed happily enough on a blip. |
