Stephen Roach: Asia is source of stagflation

Stephen Roach is one of the best financial commentators in the business. In the aftermath of the bubble in the late 1990s, as Chief Economist of Morgan Stanley, he was quite bearish and warned of the downside risks for the global economy. But, as Alan Greenspan’s elixir of easy money seduced most market participants, his warnings went unheeded.

Now, as Morgan Stanley head in Asia, people are once again perking up to listen to what he has to say. His message is that an interconnected global system has lost its locomotive of growth in the overburdened U.S. consumer. Therefore, it is unlikely that the rest of the world can ‘de-couple’ and achieve strong growth without sputtering as it finds a new engine of growth.

In the meantime, he is now warning of the threat of stagflation.

“Fears of 1970s-style stagflation are back in the air. Global bond markets are growing ever more nervous over this possibility, and U.S. and European central bankers are talking increasingly tough about the perils of mounting inflation.

Yet today’s stagflation risks are very different from those that wreaked such havoc 35 years ago.”

He goes on to point to the source of that stagflation. It doesn’t come directly from oil prices per se, but from Asian manufacturers. He says:

“For developing Asia as a whole, consumer price index inflation hit 7.5 per cent in April 2008, close to a 9½-year high and more than double the 3.6 per cent pace of a year ago. Sure, a good portion of the recent acceleration in pricing is a result of food and energy – critically important components of household budgets in poorer countries and yet items that many analysts mistakenly remove to get a cleaner read on underlying inflation. But even the residual, or “core”, inflation rate in developing Asia surged to 3.8 per cent in April, more than double the 1.8 per cent pace of a year ago.

Given Asia’s new-found role as the world’s producer, such an outbreak of surging inflation in this region is not without serious risks to the global economy.”
–Financial Times, 12 Jun 2008

Roach is a serious economist who knows global finance. We should be very proactive in dealing with the inflation menace. As a result, higher interest rates look to be a likelihood in the near future.

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