A resurgence in worldwide inflation in the past several months has been principally powered by rises in the price of food and energy, exacerbated by galloping demand in fast-growing emerging market countries.
While grain prices have exploded, those for crude oil are now above $100 a barrel, trends that weigh heavily on nearly all the world's economies and on consumer purchasing power.
The price rises reflect potent demand in emerging market nations, where surging economic momentum requires more and more basic commodities to meet production targets and to satisfy desires of better-paid workers and consumers. Worldwide supply, hampered by constraints on resources and production capacities, is struggling to meet growing demand, sparking tension in international markets and a rise in prices.
Inflation records are beginning to be set around the world, slashing hard-won household purchasing power. Price-induced friction is particularly acute in the developing world, where families must allocate the lion's share of their earnings just to buy food and fuel.
Violent, and sometimes deadly, demonstrations have broken out in several African nations against the rising cost of living. The World Bank has warned that sharply higher import bills could expose 33 countries to political and social unrest.
"We need a New Deal for Global Food Policy," World Bank president Robert Zoellick said in a recent speech to a Washington think tank.
Zoellick urged countries to provide the minimum $500 million dollars (Dh1.8bn) immediately sought by the World Food Programme (WFP) to face the mounting food crisis. But developed nations, themselves threatened by inflation, have but limited room to manoeuvre. The head of the European Central Bank, Jean-Claude Trichet, has said price stability is critical for the poorest and most vulnerable residents of the 15-nation eurozone.
The ECB has been pursuing a tight monetary policy, declining to lower interest rates because of the threat of inflationary pressure. But the institution must also grapple with slowing eurozone growth in the current atmosphere of international financial market instability.
Higher prices can erode consumer spending, one of the motors of economic growth, and can trigger a reduction in savings. In addition governments face growing agitation for higher wages from strapped workers, pressure that can in turn intensify inflation threats.
In general, significant inflation complicates planning by individuals, business and governments because of the increased difficulty in judging future values and risk. Consequently it increases the costs of carrying out transactions and is a disincentive to investment.
Experience shows that when inflation takes hold, consumers and businesses begin to anticipate future price increases, thereby accelerating the underlying inflationary pressures. In advanced countries this psychological effect tends to emerge once inflation rises above 2.0 per cent. That is one reason why the European Central Bank has set its upper target ceiling for eurozone inflation at just under this figure.
Monetary authorities fear in particular an "inflationary spiral" that could have its start in emerging nations, the current drivers of the world economy and where governments tend to favour growth over the fight against inflation.
"Number one, we need to ensure the fast yet steady economic development in the country and at the same time we need to effectively hold down inflation," Chinese Prime Minister Wen Jibao said recently.
Chinese inflation came in at 8.7 per cent in February, although the government has set a 2008 target of 4.8 per cent. If the Chinese anti-inflation drive does not bear fruit, salaries would rise, leading to an increase in the price of Chinese consumer goods exported the world over. It would also signify the spread of inflation from emerging markets to the wider world economy. (AFP)
Global inflation gathers momentum