In an article entitled “Globalized Inflation,” Joachim Fels warned in today’s Wall Street Journal that inflation is not contained and that we are in a new inflationary period.
The conventional theory is that surging food and energy costs explain virtually all of the inflation spike. Optimists claim that once energy and food prices settle down again, the overall CPI will subside as well and the current inflation scare will have been just that — a scare. But the rising price level is more than just a temporary blip. We are witnessing a shift toward a higher international inflation regime as a result of loose global monetary policy and less favorable structural forces.
–The Wall Street Journal, 18 Jun 2008
While I am more concerned with deflation, I cannot dismiss Fels out of hand. He is a well-respected and knowledgeable global financial analyst. He and I are in agreement that our central banks and their loose monetary policies are behind the inflation we now see.
The real driving force behind rising global inflation is not so much a demand-led energy and food price shock but a very lax global monetary policy stance. In the advanced economies, the main culprits are the U.S. Federal Reserve and its hyperaggressive easing in response to the credit crisis, and the Bank of Japan’s low interest rate policy.
The article makes for interesting reading.