Good times gone

Caterpillar heavy equipment moves dirt at a construction site in Lakeside, California. Caterpillar Inc is the world's biggest maker of earthmoving equipment. Bloomberg News

Caterpillar Inc plans to mark up its earthmoving equipment as much as 5 percent worldwide in July to deal with rising costs for steel, copper and oil, while UK car enthusiasts paid an average of 75,900 pounds ($151,000) for a Range Rover Vogue SE in 2007, a 20 percent jump from 2006. In April, they spent an average of 1.08 pounds per liter to fill it up, 16 percent more than a year earlier.

"We're seeing a marked increase in inflation pressure everywhere," says Harvard University professor Kenneth Rogoff, who was formerly chief economist at the International Monetary Fund. Rogoff says the threat may be the greatest since the 1980s.

Driven by rising demand for food, fuel and commodities, inflation is accelerating in every corner of the world. Merrill Lynch & Co predicts a 4.2 percent global rate this year, the highest since 5.2 percent in 1999 and almost a percentage point more than it forecast at the start of 2008.

Zimbabwe holds the inflation record. Its rate soared to 164,900 percent in February as shortages of wheat and other goods pushed the cost of a loaf of bread to $667. In Singapore, consumer prices are climbing at their quickest pace in 26 years; in the euro zone, they're the highest since 1992. "The good times are behind us," Bank of France Governor Christian Noyer said at a March 7 central banking conference.

For central banks, the inflation outbreak presents a dilemma as they strive to jump-start slowing economies. Prices for everything from crude oil to rice are hitting records at the same time bankers debate whether to cut interest rates to stimulate growth. The price of rice, the food staple for half the world, has more than doubled in a year, and reached a record high 14 times this month.

The IMF forecasts worldwide expansion will be the weakest this year since 2003 as the US reels from a one-two punch: the worst housing slump in a generation and the collapse of the subprime mortgage market.

Fed's role

Since the year began, the US Federal Reserve forced rates lower at the fastest pace in two decades to 2.25 percent. Then, in March, its policy-setting Federal Open Market Committee acknowledged the threat of elevated inflation. The European Central Bank has kept its benchmark refinancing rate at a six-year high of 4 percent. Australia, Chile, Colombia, Hungary, Poland, and Sweden have all increased borrowing costs this year.

"If I was at a central bank where inflation is rising, I'd be uncomfortable about cutting rates," says Edmund Phelps, a professor at Columbia University in New York.

Governments are battling to curb unrest by keeping prices under control. Malaysia is spending almost 800 million ringgit ($251 million) subsidizing cooking oil. Indonesia may pay 22 percent more for fuel subsidies this year than the 106.8 trillion rupiah ($11.6 billion) forecast in January.

Wrong strategy?

Such initiatives may backfire. Artificial price curbs only fan demand and ultimately make it tougher to contain inflation, Group of Seven finance ministers said in February.

Investors are pouring money into gold and inflation-linked bonds. In March, gold passed an unprecedented $1,000 an ounce before falling back to $893 on April 28.

"We've not worried about inflation since the early 1980s, but it seems to be back as a concern," says Christoph Kind, who helps manage about $9 billion in bonds as head of interest rates and currencies at Frankfurt Trust Investment GmbH.

In India, real estate prices doubled in two years. India's 7.3 percent inflation during the second week of April was the highest in more than three years.

As businesses boost prices and workers demand more pay to meet higher bills, signs of so-called second-round inflation are emerging. Kroger Co, the biggest US grocery chain, is charging more after General Mills Inc. and Kraft Foods Inc. increased prices because of their rising milk and wheat costs.

Concern that spiraling inflation will further infect the world may be overblown, says Stanley Fischer, governor of the Bank of Israel. A US recession would curb global demand, easing prices. Cheap labor in developing countries will keep some costs in check.

"I suspect we'll see more of the great moderation," says Fischer, referring to prices that began cooling in the 1980s.

Still, looming developments may aggravate inflation. Climate change could disrupt agricultural output. The fight against global warming may require expensive production methods. And governments will spend more as more people retire.

On April 9, the IMF predicted a 25 percent chance of a world recession this year and next. If it comes to pass, central bankers may face a nightmare not seen since the '70s and early '80s: stagnant growth and surging inflation, better known as stagflation.

Agencies

(China Daily 05/03/2008 page11)