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Global Inflation and Policy Responses Romuald Semblat International Monetary Fund June 2008
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Global inflation is picking up, while growth is slowing down...
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...especially in Asia, where inflation is picking up...
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...And accelerating...
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Core CPI inflation is also on the rise...
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...And accelerating as well
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The main factor is the recent increase in commodity prices...
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...As demand for energy and commodities has remained robust... This reflect the strong global growth of the past few years, especially in emerging and developing economies, led by China and India These economies’ growth are more energy and commodity intensive than developed economies
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... With most of the recent growth in oil demand coming from emerging and developing economies...
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...But there is few spare capacity...
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...And major supply constraints... Costs of investment in oil has increased significantly Investment in oil has not risen in real terms Food supply constraints as production costs and transport cost are rising
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Policies may also have played a role on the demand side... Oil subsidies prevent the pass-through of higher prices on demand and energy-saving measures
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...As well as on the supply side... On the supply side, national policies can affect negatively investments into new oil fields Biofuel policies are also spilling over to the price of key food items (corn and soybean)
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...Finally, there may be also some financial factors The weakening of the dollar has influenced commodity prices The easing in US monetary policy has generated an easing in monetary conditions in countries with currencies linked to the dollar (Middle East and Asia) exacerbating general inflation pressures
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So what can be done to tackle these problems ? Policies will need to adjust to the permanent relative price changes Policies will need to prevent second round inflation effects, and dampen inflationary expectations Advanced, emerging and developing economies can contribute in ensuring that demand and supply respond
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First, demand has to respond to higher oil prices The changes in international oil prices should pass-through to the consumer, thereby ensuring a demand response and encouraging conservation At the same time, the most vulnerable groups should benefit from well-targeted policy supports
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...And several other measures could be envisaged... Investment in the oil sector and energy resources should be encouraged. This would require ensuring stable and predictable investment regime Reducing the level of protections and subsidies for biofuels production Policies to encourage energy efficiency Agricultural policies to increase production and boost productivity
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...But in the near-term, there is a critical role for macroeconomic policies Monetary policies are the main instrument to deal with rising inflationary pressures and dampen inflationary expectations In some cases, greater exchange rate flexibility and currency appreciation could provide support to monetary policy
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