Global inflationary pressures have intensified over the past year or so, while noticeably accelerating during the first and second Q of fiscal ’08. Needless to say, inflation is rising everywhere.
This acceleration in large part reflects the impact of higher energy and commodity prices. But, what makes the current situation in our view even more acute in its urgency – are the prospects of higher oil and food prices in the months ahead.
The global headline inflation currently prints above 4.5%. Relatively speaking, despite a rise in commodity or industrial raw material prices, for several years the global price inflation had remained mostly contained and rather inactive.
However, with recent changes in macroeconomic fundamentals, oil prices rising since April more rapidly than the prices of other commodities, and as downside risks to growth persist – dynamics have changed, making the assessment and the projection of the inflation threat globally, quite a challenging task. Particularly, in the emerging markets where the economic impact of more than three billion new consumers in India, Russia, China, and the rest of Asia, it’s strongly felt on daily basis. (food prices have a large effect on inflation in low-income countries, since it makes up a greater share of consumers’ expenditure and consequently of the CPI basket)
As inflation gains significant changes in relative prices, it adds more confusion projecting its outlook and makes its monitoring aspect, very difficult.
But, regardless of which metric one chooses to measure inflation, (in U.S. deducting the GDP growth rate from the M3 growth rate, in my opinion – was one of the most precise ways of measuring inflation, unfortunately Fed stopped publishing M3 beginning of fiscal ’06) – the fact is, that inflation is here to stay and will continue to creep higher in U.S. and globally.
The reality of historic high oil prices, which in-turn have hurt and may depress global demand, will inevitably create the conditions for further inflationary pressures.