Global Inflation - Can't fight this one!!

Things have changed a lot in the last one year. Sub prime crisis has slowed the US economy substantially; Yen carry trade has reduced, as the responsibility to create bubbles around the world is taken over by the Federal Reserve by cutting interest rates below the inflation rate; and the dollar has depreciated against anything and everything.

Inflation has gone up across the globe which is reflected by the “Official numbers” of the Central banks (which are always suspiciously lower than the ground reality). Inflation is far too distant from the “Comfort zones” of the Central banks and yet they are doing nothing about it. And actually they can do nothing about it. Take for example India or China; If Reserve Bank of India raises interest rates it will surely slow the Indian economy down but won’t substantially reduce inflation as the inflation that we are facing today is “Global inflation” fuelled by easy monetary policy in the US. Raising interest rates would be a double whammy as it would slow your economy down without curtailing inflation leading to “Stagflation” which the US and the European economies faced in the 1970’s.

Crude oil prices crossed 130$/barrel last week. The rally in crude is purely investor driven. It is the side effect of the medicine that the Federal Reserve gave to save the US economy. Money will flow wherever yield is more and as the US treasury is yielding less than inflation, money is flowing to the root cause of inflation i.e. the commodities (especially Crude Oil) which is further fuelling inflation around the globe.

We are in a tight situation today. You cannot expect the Federal Reserve to raise rates as that would surely put the US economy in recession; you cannot expect Central Banks in the emerging economies to raise rates as that would lead to stagflation; you cannot expect the inflation to cool off with the continuing easy money policy. But what you can expect though is that there would be a new chapter in the Economics book for your kids and grandkids.