Inflation Threats the World Economy


Over the last months, the sharp increase in food and oil prices is fueling inflation in many countries. For instance, Eurozone inflation hit 3.1 per cent in December, U.S. CPI jumped 0.8 percent in November and China's inflation rate reached an 11-year high.

 According to a basic macroeconomic rule, the best way to lower rising inflation is to increase interest rates. Yet, most of the world’s most important central bankers are focusing now on cutting interest rates and completely ignoring the rising prices of goods and services. For example, since August 2007, the U.S. Federal Reserve has decreased rates for three times and it seems that more cuts are about to come. Also, the Bank of England, which kept rates unchanged last week, is likely to cut the benchmark rate during the next month due to the economic slowdown in the United Kingdom. So far, only the European Central Bank took measures to contain inflation. Recently, Jean- Claude Trichet said that ECB will ``not tolerate'' an inflation spiral of rising prices and wages and may even rise interest rates sacrificing economic growth.

The subprime crisis is obviously affecting the way monetary policy is done around the world. However, spending more money to buy the same goods and services may slower manufacturing and leave more people without jobs. Inflation could threat the world economy more than any crisis in the credit market and central bankers need to take appropriate measures to fight it.


Anna Fedec, analyst@tradingeconomics.com
1/13/2008 9:46:59 AM