Global Agenda: It's back

What do China, Chile and the Czech Republic have in common? - In all three, inflation rate are rising rapidly.

December 13, 2007 21:14
3 minute read.
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What do China, Chile and the Czech Republic have in common? Yes, there's that alluring onomatopoeic alliteration- the union of cha-cha republics - but that's not all. In all of them, the rate of inflation is rising rapidly. But that common feature is actually shared much more widely: virtually every developing economy, and many developed ones too, have reported in recent weeks that their inflation rate has jumped sharply. In most cases, analysts covering that country - whether it's Egypt, Indonesia, Slovenia or pretty much everywhere - have expressed "surprise" at this turn of events. Even Israel suffered from the same syndrome last month. The Consumer Price Index (CPI) for October was a positive 0.1%, rather than the negative 0.1-0.2% that had been predicted. To the man on the street, the difference may sound marginal, even trivial - and often these missed predictions are indeed innocuous. But when the same thing happens all over the world, even people who are normally innocent and gullible people begin to get suspicious. With good reason. When the price of everything that matters to normal households - starting with gasoline and heating oil, then electricity, and more recently milk, then bread and most other basic foods - records significant and repeated rises in price over a relatively short period, it is apparent that something unusual is happening. The hope that this is a conspiracy of farmers, or millers, or gas station owners against the general public, turns out - like most conspiracy theories - to be mere wishful thinking. This is for real. There are fundamental imbalances in supply and demand in most key commodities, and where the growth in demand far outstrips existing or even increased supply, prices go up. What should be surprising to the intelligent man in the street is that this hasn't happened sooner. The commodity boom is between four and six years old, depending on which commodity and how you measure its price. Yet, until very recently, inflation - as expressed by CPIs in countries around the globe - has not reflected this. That should arouse suspicion as to why the official inflation measures are not sensitive to significant changes in key prices. This time, unfortunately, the suspicions turn out to be well-founded. It's not the farmers, in America or elsewhere, not the oil companies, the gas station owners or even "the Arabs," who are responsible for the dissonance between what the consumer experiences every day and what the official inflation data report every month. It's your government - whether that government is American, British, Israeli or Chinese. All of them have, over the last 10-15 years, deliberately introduced distortions to their official inflation measures (CPIs) and thereby diluted the true impact of price rises on the economy. This sad but serious truth is well-known to professional economists and has been extensively discussed in journals and in the informal media (the "blogosphere"). It may be expected to become increasingly common fare in the mainstream media over the coming weeks and months. But the starting point of any discussion about inflation is that, by any measure, it is now rising at a much faster pace than a year or two ago. If, indeed, the official measures understate the true rate, then things are even worse than they seem. Meanwhile, in tandem with the rise of inflation, the prospect of recession - or at least a severe slowdown in the rate of growth - in developed countries is well on the way to realization. This latter threat is forcing central banks to reduce interest rates, or at least not raise them, and this "accommodative" monetary policy provides a further spur to inflationary pressures. The US and other advanced economies are now threatened with "stagflation" - that lethal mixture of no- or slow-growth and rising inflation - for the first time in a generation. With the prices of oil, corn, soybeans and many other essentials recording historic highs almost daily, there is no relief in sight. This has caused mainstream economic analysts to abandon the "what inflation?" line they had stuck to until very recently, in favor of the fall-back position of "oh, that inflation - it's a passing phenomenon and will be gone soon." It's time to stop believing them or the official data and to believe instead what you see with your own eyes in the supermarket, the mall, the shouk and the gas station every day. It's back and it's getting worse - so it's time for households to move to inflation-protection mode, in terms of investments, consumption and, perhaps above all, wages. [email protected]

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