Yesterday, the Bank of Israel decided to cut interest rates. And it did so in the face of data showing accelerating inflation. From Bloomberg:
The Bank of Israel lowered its benchmark lending rate by half a percentage point, the biggest cut in more than a year, saying that a strengthening shekel and slowing economy will bring inflation back into the target range.
The rate the central bank charges commercial lenders will fall to 3.75 percent on Feb. 28, a spokeswoman for the Jerusalem- based bank said today...
Inflation accelerated to 3.5 percent in January, the second consecutive month it exceeded the government's target range of 1 percent to 3 percent.
There was a similar tone to the story in Singapore, which reported yesterday that its annual inflation rate hit a 25-year high in January. Channel NewsAsia reports:
Singapore's annual inflation rate hit a 25-year high of 6.6 percent in January, according to Department of Statistics (DOS) data released on Monday...
From a month earlier, consumer prices in January rose 1.5 percent on a seasonally adjusted basis, the DOS said.
However, inflation is expected to moderate later in the year.
The Ministry of Trade and Industry (MTI) issued a statement along with the DOS data, saying the year-on-year jump in inflation in January was due to one-off factors such as a housing value revision and that it was in line with the official inflation forecast of 4.5-5.5 percent for 2008.
The MTI said inflation would start to ease in the second half of the year. In December, the annual rate was 4.4 percent.
But you don't have to be a small country surrounded by Muslim neighbours to think that inflation will moderate. In yesterday's post, I wrote that policy-makers in the US and Europe also think inflation is likely to moderate later in the year.
Paul Kasriel explains why.
... [I]nflation is a lagging economic variable. That is, first, real GDP growth slows and later, inflation peaks...
But is the current stagflation of the same type as that of the 1970s? I think not... [I]n the mid and late 1970s and early 1980s, there were sharp contractions in the global production of crude oil. Although there was a small contraction in crude oil production in 2006 (the latest complete annual data available), this contraction paled in comparison to that of earlier periods...
Back in the 1970s and early 1980s, labor unions were much more powerful than they are today. Cost-of-living wage increases were the rule. Now, they are the exception...
Richard Berner also thinks stagflation is unlikely. While acknowledging that there are secular and cyclical inflationary pressures,
... In my view, the time-honored forces of increased slack brought about by recession will cause inflation to slowly move lower. In that context, I expect that rising costs will soon have an impact on profit margins instead of prices, as companies are less able to pass them through to consumers.