Global inflation is increasing due to rising commodity prices, with inflation around 6% in Brazil, 10% in India, and 2.4% in the Euro area. However, much of the price increases are due to temporary factors like weak harvests or tax increases. Core inflation excluding food and fuel has risen much less. Emerging markets face more risk of persistent inflation as their economies are growing faster and monetary conditions are looser than in 2008. Tighter fiscal policy through reduced budget deficits would be a better tool than interest rates for emerging markets to fight inflation.

1. Global Inflation Feb 2011 Soaring commodity prices pushing up consumer prices across the globe. Pressure is clearest in fast growing emerging markets where people spend a big slice of their incomes on food. Brazil’s approaching 6% - India’s is close to 10%. Britain’s consumer prices rose by 3.7% in 2010. Prices in Euro area rose by 2.4% in 2010 – above the ECB’s goal. Big worry that global monetary conditions are far too loose – rock bottom interest rates and bloated CB balance sheets in the reach and emerging economies inability or unwillingness to tighten policy enough in response. Inflation could run out of control if left unchecked. Emerging markets – fear social unrest and economies overheating . But high yes but not overly so. Much recent rise due to one off factors. Weak Russian harvests, rise in VAT in UK – temporary shocks. Core inflation – ignoring fuel and food – has risen by much less – Eurozone core inflation held steady at 1.1% in early 2011. To be careful that temporary price pressure doesn’t become entrenched, through consumer expectations of future inflation or workers’ demands for higher wages. Most rich countries unemployment has kept down cost push inflation and consumer expectations still see inflation as staying low. Without higher wages rising food and fuel prices will cut into consumer spending – resulting in lower, not higher inflation down the road. Especially relevant for UK where fierce fiscal austerity is also set to dampen spending. Germany might be an exception – unemployment falling, German wages starting to accelerate – but not so bad. German wages have been squeezed for a decade. Faster wage growth would stimulate domestic demand and help to reorient Germany’s economy from export oriented growth to boosting domestic demand – cutting down on its recurrent surplus. And slightly higher inflation in Germany would make life easier for the indebted peripheral economies of the eurozone, as the cuts in wages and prices needed to make them competitive would be smaller. For both reasons the ECB should not crack down on inflation. In emerging economies it is different – economies are growing, monetary conditions a lot looser than they were in 2008 – real risk of persistent inflation. But China’s rising wages and prices should help to rebalance its economy towards domestic spending – the practical equivalent to a stronger currency. Low interest rates in rich economies make life more complicated for policymakers in emerging ones: if emerging market policy makers raise rates, they attract more foreign capital, fuelling inflation. They can try to keep the cash out through controls on foreign capital – but can be ineffective. Far better to slow spending, and thus inflation with tighter fiscal policy. In India and Brazil the main inflation fighting tool ought to be a smaller budget deficit.

2. Global Inflation Feb 2011 Rising inflation is not as worrisome as it appears, at least not for now.. Inflation is back – 4.6% in China; 5.9% in Brazil; India approaching 10%; Euro area 2.4% in Jan. UK inflation above its 2% target since December 2009 – at 3.7% in Dec 2010. Reflects dearer commodities – food, oil, metal prices (copper hit record high in feb). In Europe effort to plug fiscal gaps by increasing VAT is a factor. BUT a rise in commodity prices or taxes has only a temporary effect on inflation however – falls out of consideration after about a year. What is more worrying for Cbers is the kind of change that leads to more persistent inflation – the Second Round Effects . Price rises change expectations of inflation, leading workers to bid for wage increases that preserve their buying power and firms to push through price increases, generating a vicious spiral. These matter when there is already inflationary pressure in the wider economy – tight labour market and economy working at full capacity. Such overheating seems a long way off for advanced economies. Wage growth has been weak as unemployment high in EUI, America. G7 in 2010 running well below capacity. BUT not the scenario in emerging economies – many back to pre-crisis levels of output – capacity constraints starting to bit – underlying inflation on the up.

3. Emerging Markets Inflation Households inflation expectations are also starting to rise. In China signs of growing wage pressure. Not in itself a bad thing – for years pay has failed to keep pace with rapid productivity growth. The danger becomes when loose monetary conditions and an overheating economy mean prices and wages chase each other around. Cbers have been fighting back with higher interest rates and higher reserve requirements. BI CBs raised rates last month- China’s CB raised reserve requirements for the 7 th time in a year.