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Economist.com Articles by Subject Global inflation
Global inflation
A delicate condition
Global inflation is rising even as the world economy is slowing. How much should policymakers worry?
A delicate condition
Jan 17th 2008 HONG KONG AND WASHINGTON, DC
From The Economist print edition
From The Economist print edition
Global inflation is rising even as the world economy is slowing. How much should policymakers worry?
HAVING a little bit of inflation is like being a little bit pregnant. Is that old adage worth bearing in mind as consumer prices across the globe accelerate? Even as America flirts with recession, figures released on January 16th showed that consumer prices were 4.1% higher in December than a year earlier, up from 2.5% in 2006. In the euro area, inflation is running at 3.1%, the fastest pace since the euro notes and coins began circulating. China's inflation rate, at 6.9%, is the highest in 11 years.
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According to an index produced by Goldman Sachs, global inflation was 4.8% in the year to November, two percentage points up from the previous year (see chart). Prices accelerated in 80% of the countries that Goldman tracks.
By historical standards, this is all small beer. An inflation rate of 5% hardly marks a return to the double-digit price increases that haunted rich countries in the 1970s and emerging economies for far longer. (For much of the 1990s, the average inflation rate in poor countries was 50%.)
Nonetheless, the upswing is broad enough to pose awkward questions. With ever more signals, from weak retail sales to rising joblessness, pointing to an American recession, is the world headed for a bout of stagflation-lite? And will stubborn price pressures constrain the marked easing of monetary policy that America's central bankers now promise?
The answers depend on what has been driving inflation up and whether those pressures persist even as economies slow. Ultimately, inflation is a monetary phenomenon, so responsibility lies with central bankers. Pessimists point out that monetary conditions have been loose in recent years, with real interest rates low and credit growth rapid, particularly in emerging economies.
Others worry that the task of central bankers has become harder as globalisation has shifted from being a disinflationary phenomenon to an inflationary one. The downward price pressure from cheap Chinese goods may be abating while the developing world's rampant demand for resources may continually drive commodity prices higher.
There is some truth to these arguments, but none offers a complete explanation of recent price trends. In some emerging economies monetary laxness is clearly fuelling inflation—in the Gulf states, for instance, as the direct consequence of their dollar pegs.
But elsewhere the picture is less clear. Take China, where fears of social unrest have made inflation one of the government's top concerns and have led it to impose various price controls over the past week. The accumulation of vast foreign-exchange reserves has fuelled domestic money growth and the inflation rate has tripled in the past year. But that rise is almost entirely due to a jump in food prices, particularly of pork. Core inflation (excluding food, but including oil) is running at only 1.4%. Pig disease deserves more blame for China's recent inflation than loose policy. What's more, China's monetary conditions are tightening fast.
Nor is China's deflationary effect on global tradable-goods prices about to end. To be sure, Chinese wages are accelerating, up by 19% in the year to September, the fastest pace for five years. But those official figures, which include only state-sector workers, almost certainly exaggerate overall wage increases. More important, China's productivity is growing faster, by 20% a year, according to America's Conference Board, a research organisation. That means overall unit costs are still falling.
It is true that the prices of American imports from China are rising after several years of decline. But that has more to do with the weakness of the dollar than with increasing Chinese production costs. And even if the prices of Chinese goods rise, they could still dampen inflation in richer economies, because they are much cheaper than domestically produced equivalents and are gaining market share. As China produces higher value items, it will push down prices of domestically produced goods in ever more industries.
A more direct link between developing countries such as China and inflationary pressure comes through commodity prices. The prices of many raw materials have surged in the past 12 months. The Economist's dollar-based commodity-price index is up by 26% from a year ago. The food index is up by almost 50%. The price of oil has risen almost 80%. These jumps are the main cause of higher inflation across the globe. They are also related, at least in part, to structural changes in the global economy.
The world economy is increasingly powered by countries, such as China and India, whose growth is far more energy- and commodity-intensive than that of rich countries. Since 2001, China has accounted for about half of the increase in the world's demand for metals and almost two-fifths of the increase in oil demand.
This shift means that the usual relationship between America's business cycle and commodity prices may change. Past American recessions have sent the prices of oil and other resources down. That may no longer be so. Economists at HSBC say that the correlations between industrial output and commodity prices began to fall apart a few years ago.
But that does not mean commodity prices will continue to surge. Emerging economies may be more resilient to an American recession than hitherto, but they are unlikely to grow faster. At the margin, therefore, the demand for commodities will slow. And in the longer term, higher commodity prices will eventually lead to greater supply. Much of the surge in raw-material prices in recent years reflects the fact that few foresaw the pace of emerging-market growth. All of which suggests that, even if commodity prices don't fall, their rate of increase will ease, and the biggest driver of recent global price pressure will weaken.
So is it time to stop fretting about inflation? Not quite. For a start, a pick-up in underlying inflation suggests that price pressure has seeped beyond commodities. According to Goldman's index, core consumer prices, which exclude the volatile categories of food and fuel, are rising in some 70% of countries. Second, economic weakness does not immediately suppress underlying price pressure. Goldman's economists point out that during the 2000-02 global downturn, core inflation in G7 countries peaked more than a year after growth started to weaken. The rich world could easily face a prolonged period of weaker growth and persistent price pressure.
How much to worry depends on whether this combination affects people's expectations of future inflation. Academic evidence suggests that low, stable inflation expectations are the main difference between today and the 1970s. Because central banks have earned a reputation as inflation fighters and people expect long-term inflation to remain low, price shocks—even on the scale of the recent commodity-price surge—need not translate into persistently higher inflation. Were workers and firms to expect higher inflation, and set wages and prices accordingly, central bankers would face a big problem.
That concern is haunting the European Central Bank (ECB). Judging by its survey of professional forecasters, long-run inflation expectations remain stable: the seers predict 1.9% in five years time. But consumers' expectations of price rises over the next year have risen quite sharply. What is more, unemployment is low and, judging by the unions' opening bids in pay negotiations from Germany to Italy, workers are demanding hefty wage increases. The risk of a wage-price spiral, albeit a modest one, is not negligible. The ECB's hawkishness—including threats that interest rates might have to rise—is designed to stamp it out.
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The Fed has more leeway, though inflation has picked up faster in America than in the euro zone. Judging by the spread between American Treasury bonds and Treasury Inflation-Protected Securities, investors' expectations of inflation between five and ten years hence have been falling (see chart).
Given the American backdrop, the Fed's recent decision to step up the pace of interest-rate cuts is understandable. The weak economy poses a bigger danger than inflation. But there are risks. Even if commodity-price inflation wanes, the falling dollar means America faces other inflationary threats. And if overall price pressure remains stubbornly elevated, inflation expectations may yet rise. If that happens, the Fed will face the unenviable task of curtailing its easing or even raising rates while the economy is weak.
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Saturday, January 19, 2008
Friday, January 18, 2008
Reason to Rock: Epigraph
Men are not suffering from the lack of good literature, good art, good theatre, good music, but from that which has made it impossible for these to become manifest. In short, they are suffering from the silent, shameful conspiracy (the more shameful since it is unacknowledged) which has bound them together as enemies of art and artist. They are suffering from the fact that art is not the primary moving force in their lives. They are suffering from the act, repeated daily, of keeping up the pretense that they can go their way, lead their lives, without art.
Thursday, January 17, 2008
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Sunday, January 13, 2008
The Moral Instinct - New York Times Steven Pinker
The other hallmark is that people feel that those who commit immoral acts deserve to be punished. Not only is it allowable to inflict pain on a person who has broken a moral rule; it is wrong not to, to "let them get away with it." People are thus untroubled in inviting divine retribution or the power of the state to harm other people they deem immoral. Bertrand Russell wrote, "The infliction of cruelty with a good conscience is a delight to moralists — that is why they invented hell."
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Much of our recent social history, including the culture wars between liberals and conservatives, consists of the moralization or amoralization of particular kinds of behavior. Even when people agree that an outcome is desirable, they may disagree on whether it should be treated as a matter of preference and prudence or as a matter of sin and virtue. Rozin notes, for example, that smoking has lately been moralized. Until recently, it was understood that some people didn't enjoy smoking or avoided it because it was hazardous to their health. But with the discovery of the harmful effects of secondhand smoke, smoking is now treated as immoral. Smokers are ostracized; images of people smoking are censored; and entities touched by smoke are felt to be contaminated (so hotels have not only nonsmoking rooms but nonsmoking floors). The desire for retribution has been visited on tobacco companies, who have been slapped with staggering "punitive damages."
At the same time, many behaviors have been amoralized, switched from moral failings to lifestyle choices. They include divorce, illegitimacy, being a working mother, marijuana use and homosexuality. Many afflictions have been reassigned from payback for bad choices to unlucky misfortunes. There used to be people called "bums" and "tramps"; today they are "homeless." Drug addiction is a "disease"; syphilis was rebranded from the price of wanton behavior to a "sexually transmitted disease" and more recently a "sexually transmitted infection."
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The idea that the moral sense is an innate part of human nature is not far-fetched. A list of human universals collected by the anthropologist Donald E. Brown includes many moral concepts and emotions, including a distinction between right and wrong; empathy; fairness; admiration of generosity; rights and obligations; proscription of murder, rape and other forms of violence; redress of wrongs; sanctions for wrongs against the community; shame; and taboos.
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When anthropologists like Richard Shweder and Alan Fiske survey moral concerns across the globe, they find that a few themes keep popping up from amid the diversity. People everywhere, at least in some circumstances and with certain other folks in mind, think it's bad to harm others and good to help them. They have a sense of fairness: that one should reciprocate favors, reward benefactors and punish cheaters. They value loyalty to a group, sharing and solidarity among its members and conformity to its norms. They believe that it is right to defer to legitimate authorities and to respect people with high status. And they exalt purity, cleanliness and sanctity while loathing defilement, contamination and carnality.
The exact number of themes depends on whether you're a lumper or a splitter, but Haidt counts five — harm, fairness, community (or group loyalty), authority and purity — and suggests that they are the primary colors of our moral sense. Not only do they keep reappearing in cross-cultural surveys, but each one tugs on the moral intuitions of people in our own culture.
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Putting God in charge of morality is one way to solve the problem, of course, but Plato made short work of it 2,400 years ago. Does God have a good reason for designating certain acts as moral and others as immoral? If not — if his dictates are divine whims — why should we take them seriously? Suppose that God commanded us to torture a child. Would that make it all right, or would some other standard give us reasons to resist? And if, on the other hand, God was forced by moral reasons to issue some dictates and not others — if a command to torture a child was never an option — then why not appeal to those reasons directly?
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At the very least, the science tells us that even when our adversaries' agenda is most baffling, they may not be amoral psychopaths but in the throes of a moral mind-set that appears to them to be every bit as mandatory and universal as ours does to us. Of course, some adversaries really are psychopaths, and others are so poisoned by a punitive moralization that they are beyond the pale of reason. (The actor Will Smith had many historians on his side when he recently speculated to the press that Hitler thought he was acting morally.) But in any conflict in which a meeting of the minds is not completely hopeless, a recognition that the other guy is acting from moral rather than venal reasons can be a first patch of common ground. One side can acknowledge the other's concern for community or stability or fairness or dignity, even while arguing that some other value should trump it in that instance. With affirmative action, for example, the opponents can be seen as arguing from a sense of fairness, not racism, and the defenders can be seen as acting from a concern with community, not bureaucratic power. Liberals can ratify conservatives' concern with families while noting that gay marriage is perfectly consistent with that concern.
The science of the moral sense also alerts us to ways in which our psychological makeup can get in the way of our arriving at the most defensible moral conclusions. The moral sense, we are learning, is as vulnerable to illusions as the other senses. It is apt to confuse morality per se with purity, status and conformity. It tends to reframe practical problems as moral crusades and thus see their solution in punitive aggression. It imposes taboos that make certain ideas indiscussible. And it has the nasty habit of always putting the self on the side of the angels.
... nowhere is moralization more of a hazard than in our greatest global challenge. The threat of human-induced climate change has become the occasion for a moralistic revival meeting. In many discussions, the cause of climate change is overindulgence (too many S.U.V.'s) and defilement (sullying the atmosphere), and the solution is temperance (conservation) and expiation (buying carbon offset coupons). Yet the experts agree that these numbers don't add up: even if every last American became conscientious about his or her carbon emissions, the effects on climate change would be trifling, if for no other reason than that two billion Indians and Chinese are unlikely to copy our born-again abstemiousness. Though voluntary conservation may be one wedge in an effective carbon-reduction pie, the other wedges will have to be morally boring, like a carbon tax and new energy technologies, or even taboo, like nuclear power and deliberate manipulation of the ocean and atmosphere. Our habit of moralizing problems, merging them with intuitions of purity and contamination, and resting content when we feel the right feelings, can get in the way of doing the right thing.
Saturday, January 12, 2008
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