Inflation hits consumers worldwide

The rising prices complicate policy efforts to battle recession.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the April 11, 2008 edition

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Gas pumps in the United States tell the same story as rice prices in Thailand: Inflation is a global phenomenon this year.

Oil hit a record $112 per barrel this week, and a United Nations official warned of continued pressure on food prices, which by one index are up 45 percent in the past year.

The challenges are worst in developing nations, where raw materials account for a larger share of consumer spending. But another factor – the sagging value of the US dollar – means that imports cost more in America and other nations that peg their currencies to the dollar.

Still, regardless of this currency phenomenon, several broad forces are pushing prices up.

After years of strong global economic growth, prices of oil, grains, and some metals have spiked. Investors are adding fuel to that fire by buying up hard assets like commodities, which are viewed as a hedge against inflation.

More fundamentally, many nations have been relatively loose in the creation of money supply. For all the news about interest-rate cuts by the Federal Reserve, this trend goes well beyond US shores.

"We got to the higher inflation rates we have today versus a few years ago because monetary policy in general has not been real restrictive," says Jay Bryson, global economist at Wachovia Corp., a bank and investment firm in Charlotte, N.C. "At the end of the day the central banks of the world were running relatively loose policies."

That creates a tug-of-war for policymakers now, because the world's largest economy is slowing down and may be entering a recession. The question in the US, and some other advanced economies, is whether to focus on stimulating growth or fighting inflation – which typically require opposite policies.

In its "World Economic Outlook" report issued Wednesday, the International Monetary Fund warned of a sharp slowdown in global economic growth this year, with America in recession.

IMF economists see global growth of 3.7 percent this year, much lower than the 4.8 percent they had forecast last October. At the same time, the report warned of rising inflation pressures.

The Federal Reserve has been easing cutting short-term interest rates to stimulate a recovery. And the Bank of England cut its interest rate Thursday.

Most economists say the Fed's moves are appropriate. But they also point to the possible need for concerted action by the world's central banks to fight inflation once the US economy has been stabilized.

"The near term worry here is probably too-slow global growth" in the next few quarters, Mr. Bryson says. "But if a US recession proves to be fairly mild in depth, "then the bigger worry may go back towards inflation."

Still, for consumers worldwide, the price pressures are a very present and urgent concern. As of this week, Americans are paying a record $3.36 per gallon for gasoline, the American Automobile Association reported.

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