June 16, 2008 | posted by Michael Baxter in inflation |

Inflation is back in the public spotlight yet again.   Uncle Sam kicked off the latest round, with news that May saw consumer prices rise by an alarming 0.6 per cent.

But inflation worries are doing the globe.     The Asian Development Bank is making dire warnings about rising prices in Asia, and the G8, meeting in Osaka, and the World Economic Forum too, seem to be wringing their hands over the beast known as inflation.

In the US, the headline figure measuring month-on-month changes in consumer prices rose by 0.6 per cent, compared to an expected 0.5 per cent.  The annual rate of US inflation is now 4.2 per cent.

No prizes for guessing why.  Energy prices shot up by a stunning 4.4 per cent in just the one month.    US food prices rose by a more sedate 0.3 per cent.

Peek beneath the surface though, and strip away food and energy, then the picture is not so bad.  The month-on-month change in consumer prices without food and energy was just 0.2 per cent and the annual rise 2.3 per cent.

Neither is the rise in the headline figure quite so unprecedented.  It was higher in November last year, for example.

The real problem seems to be that it is a worldwide problem now.

Asian Development Bank (ADP) is worried.  Inflation in India has hit a seven-year high; inflation in Vietnam has topped 25 per cent; and across the continent the ADP reckons average inflation will be greater than the 5.1 per cent previously estimated.

Meanwhile, finance ministers at the G8 busily put out a joint communiqué yesterday.  “Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable and may increase global inflationary pressure,” they said.

There is no doubt that the economies of Asia are facing a serious inflation problem.   But as for the UK, Europe and the US, the jury is out.  There are two points, however, in the story.

The price of oil is shooting up, food too; this is creating inflationary pressures that remind many of the 1970s.

However, wage inflation remains modest; the credit crunch is starving Western economies of cash.    If the monetarist are right, and inflation is always a monetary phenomenon, then a credit crunch is hardly the condition upon which you would expect inflation.

However, we may be paying the price for early noughties excess.     Inflation was low earlier this decade because of cheap imports from China and India.  But, during this time, the money supply ballooned, and spending shot up.

Now we are seeing the flip side.  Demand from India and China is pushing up commodity prices.

You can’t celebrate low inflation caused by external factors for years, then, when inflation picks up, say it doesn’t matter and that it is down to external factors.