Inflation: What If The Unthinkable Happens?
Currently, there are two places in the world that are experiencing significant increases in prices and more may be coming. India’s Federal Chief Statistician Pronab Sen told a private television channel on Tuesday that the monthly inflation may touch double digits by March according to the Times of India. “It is really possible,” he said. India’s wholesale price index rose to 7.31% in December from a year earlier, driven by higher food prices. Processed food items rose 26.40% in December and non-processed food items increased by 19.17%. The Reserve Bank of India had only projected a 6.5% overall inflation rate and may be forced to begin raising interest rates soon.
The UK announced the largest increase in inflation since records began in 1997 with December consumer prices rising 2.9% from a year earlier and full percent higher from November. Core inflation accelerated to 2.8% and is the fastest rate of increase on record. This breaches the Bank of England’s 2% target for the first time since last March and potentially complicates their quantitative easing program. Currently, the BOE benchmark interest rate is at an all time low of 0.5%.
Both the UK and India stimulated their economies by cutting interest rates aggressively during the financial crisis in 2008. The exit question is now front and center with the global economy recovering and inflation rates accelerating. The world central banks have been operating under the assumption that due to high unemployment that inflation would remain tame.
What if they are wrong? What happens if the velocity of money begins to increase in a meaningful way?
In December, we had a taste of what the US bond market can do once it begins to shift it’s expectations for economic growth. The 65 basis point rise in the US 10 year note yield caught everyone by surprise and we’re now awaiting to see what other banks may have missed fixed income earnings expectations. More importantly, the US government auctions will be less and less attractive to investors.
Given the trajectory of US government deficit spending for 2010, the concern over inflation will be persistent as US growth continues into the first quarter.
Tags: India, inflation, UK, US budget deficit
January 19th, 2010 at 9:40 am
I agree with you and believe the USA will experience hyper inflation in the future when demand and unemployment rates are back to normal. However, the present threat for de-railment of the US economy is deflation. The US has a slimmer tech/finance based economy that can adapt quicker and avoid upward pressure on prices stemming from under-utlization of production capacity. Technology is the key now to the fight against inflation. The US (and other countries) have no choice but to print money to decrease the massive deficits they created. Global inflation, unfortunately is our friend for the. Global economies that are highly industrialized and manufacturing based will suffer the most in this environment. If they try to tighten, it will be worse since their manufaturers will not be able to borrow to stave off the decrease in demand and under-utlization costs of their factories. The dollar should strenghten as well…
January 19th, 2010 at 12:21 pm
Was hoping you might at least attempt to answer the question you posed in the title – very disappointing!
January 25th, 2010 at 9:35 am
I do believe inflation is coming to the US especially if the US embarks upon additional spending from the government. This is why President Obama will discuss reducing the deficit in his state of the union address even though the economy is just starting to recover. The key is whether Congress will follow where he leads.
I think the best thing is that all programs and spending have stabilized the economy for now. However, there is a cost to this. We need to have the private sector be the engine of job growth, not the government for self-sustaining jobs. Otherwise, tax and spend will fuel the inflation.