On any given day, central banks of the industrialized world face numerous
challenges, the latest being skyrocketing food and energy prices caused by
global imbalances between supply and demand. It is great that global demand is
pushing world economies forward. However, as the supply also lags, prices surge,
as does the risk of inflationary ripples adversely impacting economies in both
developed and developing countries.
Commodity prices are the main
culprit, particularly food and energy, as the emerging markets pump up the
demand, while the rest of the world struggles to keep up the pace. In China, for
example, the country's newfound prosperity is sending its citizens to grocery
stores, car dealerships, homebuilding sites, etc. Unfortunately, monetary policy
makers both in the demand and the supply hotspots appear sadly unprepared for
dealing with global inflationary threats.
Granted, the financial markets
turmoil has thrown economies all over the world out of whack. The worst was
experiencing a major shift in the global economic balance, with the U.S. economy
slowing down more than anyone could have expected (although somebody should
have!). Add to that the unrelentingly steep growth curve of the emerging markets
and we could end up with an inflationary disaster of global proportions. It's no
wonder that central bankers are losing more and more sleep as of late.
Talking about what is already happening is an exercise in futility,
unless we can estimate when, how and if things are to settle down. One plausible
scenario is that the slowdown in the U.S. is likely to cause slowdowns in many
other economies. In turn, those secondary and externally caused slowdowns are
likely to ease the demand for commodities, thus somewhat easing the grip of
surging prices.
Yet, the International Monetary Fund (IMF) begs to
differ, stating that the demand for commodities is not even close to tapering
off. To illustrate, in China, inflation is at 7.1% or at an 11-year high, while
in India, inflation is dancing around the five-percent level. Furthermore, the
emerging markets are not the only ones dealing with the effects of surging food
and energy prices. In the U.S., for example, inflation has hit four percent,
while in the European Union it averages about 3.2%.
There is another
worrisome effect of rising prices and inflation. Central banks are becoming
increasingly worried about the negative public sentiment with respect to the job
they have been doing, or rather the lack of it. Meaning, if prices and inflation
are surging and central banks are merely playing catch-up without effecting any
real change, what is their purpose then?
According to Jean-Claude Trichet
of the European Union's central bank, "The difficulty in the present juncture is
disentangling what is structural and what is conjectural." In other words,
Trichet wondershow much of the global trend has been caused by structural
imbalance between demand and supply, and how much of it has been the consequence
of jittery traders, spooked investors and the existence of the overall state of
fear. I'm afraid no disentangling will be necessary this time around because
what has been going on lately in global markets is the result of both structural
and conjectural shifts, neither of which is likely to resolve itself easily and
without serious uphill battles.
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