Monday, August 25, 2008

There’s still a lot of inflation in the pipeline to hurt global economies

There is a lot of talk about the oncoming deceleration in inflation across the world. Oil has dropped precipitously; currently, it is trading in the $115-$119/barrel range, which is well below its peak above $145/ barrel in July. US gas prices have dropped 9% since they peaked over $4/barrel in July. With energy dropping and global growth slumping, price pressures are set to subside in coming months.

That is a good thing, but it ain’t over yet. There is still a lot of inflation in the pipeline that will continue to squeeze consumers and firms over the next year.

Inflation has spiked in many countries, and many Asian countries have seen record inflation rates. For some of these countries, price pressures were already building under years of export growth, and the recent surges in oil prices launched inflation rates to unmanageable territories. Curbing inflation became a top priority, and for many like the People’s Bank of China, inflation is still a serious concern.

The chart illustrates annual inflation rates in various Asian countries and in the United States. In Asia, the latest data suggest that inflation is still accelerating in Japan, Malaysia, Philippines, South Korea, while it is decelerating in China and Singapore.

At the same time, global growth is slowing. On an annual basis, growth slowed in Japan 0.18% in the second quarter of 2008 (Q2), in Malaysia 0.16% in the first quarter of 2008 (Q1), in the Philippines 1.27% in Q1, in Singapore 4.8% in Q2, in South Korea 1.08% in Q2, in Taiwan 1.93% in Q2, and in the US 0.72% in Q2.

Energy and oil cost less, resulting in lower expected inflation. In the US, gas prices are falling, and in China, energy prices have risen for two consecutive months. A slowing global economy and decelerating energy prices will relieve inflation pressures across the world.

However, there is still a lot of inflation in the pipeline that will continue to plague consumers and firms. Gas prices have plummeted since July, but they are still 31% over their average level between 2005 and 2008, 2.82 $/gallon. Without a likewise increase in wages and incomes, consumers will continue to feel strapped for cash. The merits of wage pressures are not under scrutiny here, but the fact is that even though gas prices are falling, consumer spending will likely continue to slow. There is a similar story across the world, even where wages have started to rise.

Correction: the second column should read: "Average inflation 2000-2007."

Globally, inflation is also set to abate, but the 7-yr average inflation rate across China, Malaysia, Singapore, Taiwan, Japan, Philippines, South Korea, and the US is far below their current and expected inflation rates. This is problematic, and unless inflation falls precipitously further, Asian producers and consumers alike will feel the pressure. Cost pressures are in the pipeline for Asia’s strongest exporters, and no matter how resilient are firms to the wage and energy price pressures, production is likely to slow a through 2008 and into 2009.

The fall in oil and energy prices is very good news for the global economic outlook. However, there is still a lot of inflation in the pipeline; consumer spending and firm production across the globe are set to slow through 2009.

Please leave comments. Best, Nontruths


  1. Dop you happen to know which countries are subsidizing the price of gas for their citizens? What effect will that have on their inflation rate?

  2. Hi Aunt Jane,

    Off the top of my head, Malaysia, Indonesia, India, Taiwan, and China subsidize heavily. Thus, if the subsidies are not repealed (at least in part), especially since emerging markets account for 60% of world growth, demand for energy consumption will not change. Recently, India, Malaysia, Indonesia, Taiwan and China (two times, as referred above) have reduced energy subsidization, effectively raising the prices faced by consumers and firms.

  3. Thanks. Their actions really screw up the data a lot. I can understand it but realism is not part of their makeup. Was in Indonesia a couple of times - Jakarta and Medan - and the oppression is evident, just like in China.

  4. This is one of the reasons why I have no time for all this deflation talk. Central banks are printing huge amounts of money, largely to maintain quasi-fixed parities with the dollar. The world money supply is rising sharply and this will push world inflation upwards. It has started to feed back into the US via commodity prices.


  5. Hi Alice,

    You have a super, and I mean super, good point. There is a lot of excess currency out there, where inflation is inevitable in the countries to where it flows. One must ask herself how long China can maintain its peg with the rate that it is accumulating USD.