Tuesday, May 23, 2006


Commodity Inflation May Outweigh Cheap Imports

A global financial study is out. "Growth in the 30 mostly industrialised economies of the OECD is forecast to expand 3.1 percent overall this year, up from 2.8 percent in 2005, the Organisation for Economic Cooperation and Development said in its Economic Outlook, a twice-yearly report. 'The ongoing expansion is entering its fifth year,' it said."

"Global economic growth is speeding up and has spread to weak spots such as Japan and Europe without sparking a surge in inflation so far, the OECD said. Like the IMF, the Paris-based OECD said that current account imbalances, surpluses in China and Japan and deficits in the United States, posed a continuing and perhaps mounting threat.

"'A brutal unfolding of such imbalances would hurt the world economy,' chief economist Jean-Philippe Cotis said."

"The OECD made a first attempt to quantify how globalisation and cheap Chinese and broader Asian exports affect prices and it reported a greater inflation-limiting impact in Europe than in the United States. From 2001 to 2005, imports from China and other Asian countries knocked the U.S. rate of inflation down by 0.1 percentage points each year, and trimmed Europe's inflation rate by nearly 0.3 percentage points a year. Chinese exports have risen four-fold in 15 years."

"But Cotis said it remained to be seen whether this benefit was not more than offset by insatiable demand for oil, metals and other commodities in China and other rapidly developing economies of Asia, and the resulting upward pressure on prices. 'Experience over the past three years suggests commodity price pressures may significantly outweigh the disinflationary influence of low-cost manufacturing imports,' Cotis said."

"The OECD report did voice concern about what the organisation sees as more serious risks for the longer term. It said a risk of housing market downturns had become more pronounced in the United States, France and Spain but depended partly on future interest rate developments. It echoed the view that monetary policy was getting more restrictive after years of super-cheap lending but said it would be unwise to rush into more rate rises in the 12-nation euro zone, and that the Japanese central bank should not raise rates until next year."

"The OECD predicted a further quarter-point rise in the key U.S. policy rate to 5.25 percent, then a pause followed by a possible cut of the same size a year from now. 'A light 'tap on the brakes' seems necessary to keep the economy in balance,' the OECD said."

"It advised the Bank of Japan to keep rates at close to zero until the end of 2006 while awaiting proof that Japan's totally different problem of deflation was a thing of the past, suggesting a rise to 1 percent by end-2007 could follow."

"It reserved its most eye-catching advice for the ECB, which the financial markets believe is itching to raise its key euro zone rate from 2.5 percent as early as next month. The OECD assumed the ECB would raise rates by another 1.25 percentage points gradually, but only from later this year, once hard economic data had confirmed a full-blown recovery."

'Chief economist Cotis said the ECB should hold fire until October, after second-quarter GDP data would presumably have confirmed a recovery which is so far looking stronger in 'soft' confidence surveys than in 'hard' data such as GDP figures.'

'IMF chief Rodrigo Rato said the same thing in Vienna on Monday, remarking: 'We see the need for monetary policy to be very aware in Europe of the first stage of the recovery.'

Even with inflation breathing down their necks, the global bunch are terrified of raising rates. IMO, what they fear most is deflation.
Interesting analysis. In other words, no such thing as inflation-free growth. What about considering the efficiency of resource deployment and consumption. Will asian industry get more resource efficient?
When housing deflates, it will not creep into their CPI for a long time. Since housing was removed from CPI in the 80's, their numbers will not consider it until the trickle down effect occurs much later.
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