Inflation, not slowdown, remains top global risk

May 11, 2011

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Has the global economy hit a soft patch? A week after a sell-off skimmed froth from bubbly commodities markets, Chinese inflation figures have come in a fraction lower. But the impression that the global economy is cooling, and the conclusion that monetary tightening can be deferred, is wrong. Inflationary pressures still need to be checked.

China’s annual rate of inflation moderated to 5.3 percent in April from 5.4 percent the month before. That’s still very high. And inflationary forces are plain to see. Wages are widely reported to be rising at double-digit rates. The yuan is appreciating at only a slow pace against the U.S. dollar. The latest huge trade surplus suggests forex reserves will keep booming, and with them the money supply.

Record export figures provide further confirmation that the global recovery is firmly on track. China’s exports were up a staggering 29.9 percent in April from a year earlier.

Meanwhile, a fast-growing emerging world craves German goods. German exports in March were up by 19.9 percent on a year earlier and shot way above the record set in April 2008. The data prompted one economist to claim that Germany is on the verge of “a golden decade”.

What is clear is that rapid export growth is adding to inflationary pressure in Germany and China. German consumers are spending. Inflation in Germany has jumped to 2.7 percent on the euro zone’s HICP measure, while inflation in the euro zone could soon hit 3 percent. The European Central Bank will need to raise interest rates. Yes, the zone’s periphery is in trouble. But the ECB cannot let inflation soar in the core economies.

Investors and perhaps policymakers keep seeing soft patches in the global recovery. The reality is that limited monetary tightening hasn’t checked global growth very much. The German and Chinese export booms ought to be echoing loudly. Most interest rates remain negative in real terms: the mix of strong demand and easy money suggests more tightening will be needed to prevent commodities flying again and global inflation soaring. The hard data doesn’t look so soft at all.

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The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

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