Saturday, 26 May 2007

Inflation turns up, central banks still waiting

Inflation trends appear to be turning up.

Bloomberg reports that Japan's consumer prices fell at a slower pace in April.

Core prices, which exclude fresh food, declined 0.1 percent from a year earlier, the statistics bureau said today in Tokyo, matching economists' estimates. The measure of inflation fell 0.3 percent in March, the steepest drop in two years...

April's decline in core consumer prices was the third straight monthly drop. Core prices in Tokyo, a harbinger of nationwide prices, were unchanged for a second month in May, also in line with economists' expectations.

And consumer prices increased in four German states in May.

Prices in the German state of North-Rhine-Westphalia rose 0.2 percent from April, the state's statistics office in Dusseldorf said today. That matches monthly gains in the states of Saxony and Hesse. In Brandenburg, prices advanced 0.3 percent from April. Economists expect German inflation in May to hold at 2 percent, when measured by a harmonized European Union method, the median of 11 estimates in a Bloomberg News survey shows...

German import prices, an early indicator for inflation pressures, rose 0.9 percent in April from the previous month, the biggest gain in nine months, the Federal Statistics Office in Wiesbaden said today. Prices rose 0.5 percent in the year.

This comes at a time when the German economy is showing considerable resilience.

In Germany, consumer confidence rose to a five-month high, GfK AG's index for June showed today...

As is the UK's, as Reuters reports.

The Office for National Statistics said the economy grew by an unrevised 0.7 percent in the first three months of the year, the same heady pace as the past two quarters. The annual rate was revised up by a tenth of a percentage point to 2.9 percent, just below the 3.0 percent rate of the previous quarter...

The latest data showed the implied GDP deflator -- a measure of price pressures in the economy -- recorded an annual rate of 3.2 percent -- the highest since the fourth quarter of 2003.

If economic growth is strong and inflation is turning up, then interest rates must be too low. That is what this Reuters article says:

The world economy is booming, financial markets are supercharged, energy prices are sky-high and credit growth is accelerating. If that spells inflation to you, global monetary policy looks way too loose.

The problem is there is no single world interest rate to readjust accordingly and no one institution to do it. As a result, there's growing anxiety about whether any nascent world inflation threat can or will be met head on.

That is further complicated by the fact that inflation in the US appears to be hidden.

U.S. inflation appears to be ebbing as the economy slows, but the trend may have more to do with systematic undercounting than newfound purchasing power.

Perhaps the Federal Reserve should place greater weight on monetary aggregates and asset prices, as Doug Noland suggests.

There is inevitably a high price to pay for inapt policies that explicitly disregarded money and Credit, refused to address asset inflation and Bubbles, and promised aggressive reflations as necessary. Today, we negotiate and prescribe policy from a sadly weakened stature. After all, how can we earnestly stipulate fair trading practices when, as Fan Gang noted, “the U.S. prints money to buy things” – and floods the world in dollar liquidity in the process?

The latter is a good point. While China itself is widely believed to contribute to excess global liquidity, Chinese policymakers are unlikely to do anything about it as long as they themselves believe that they are only recycling liquidity created by the US.

And with Japan still waiting for inflation to make a comeback, that means that the European Central Bank and the Bank of England are the only major central banks contributing to global tightening for the time being.

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