Thirty years on, inflation makes global comeback
Inflation, the curse of the 1970s, is staging a comeback, led by sky-high oil prices. This time, the menace is more genuinely global than three decades ago, and this time much of it is “Made in China”.
Wary of past errors, Western central banks may well opt for shock therapy — interest rate rises — in an effort to prevent prolonged stagflation, the toxic mix of inflation and economic stagnation that followed the oil crises of the 1970s.
Their prospects of success depend at least in part, though, on how willing the rising powers of the developing world are to play the game, above all China, an economy that was shut to the outside world 30 years ago but has now taken it by storm.
While inflation is far higher in faster-growing regions than in the United States and Western Europe, everyone feels the pain because of the globalization of trade, says Stephen Roach, Asia region chairman of Morgan Stanley.
“The risks of a new stagflation are mounting,” he said in an article earlier this month. “Like nearly everything else in the world these days this one is likely to be made in Asia.”
Average annual inflation rates in the developing world were about three times those of industrialized economies last year, and that overrun will widen in 2008, according to figures from the International Monetary Fund.
IMF forecasts, published last April and perhaps in need of upward revision, foresee world inflation rising from an average of 3.9 percent for 2007 to 4.7 percent in 2008 credit scores. Revealingly, the IMF sees the inflation rate nearly doubling to just short of 12 percent in the emerging and developing world, as opposed to rising from 2.2 to 2.6 in advanced economies.
In rich and poor countries, fuel and food prices surges have sparked wave after wave of protests by truckers, taxi drivers, fishermen and farmers demanding government action, increasing fears of political instability and economic downturn.