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Saturday, May 24, 2008

Inflation mugger is back

Inflation is back. Developing countries without tightly anchored inflation expectations will suffer most from the inflation serial killer. Developed countries with better monetary policy shouldn't feel too complacent, either.  While wage is not likely to rise in America where labor unions have much less negotiation power than 70s, Europe could face a tough fight. 
 
Ultimately, to fight inflation, central banks in developing countries will have to raise their interest rate significantly.  And this raises the question of how to control the flow of hot money: the diverging interest rate policies in the US and developing world, thus the increasing interest differentials, will likely dramatically increase hot money flows out of the United States.
 
Read more on the issues at Economist.com
 
 
RONALD REAGAN once described inflation as being "as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man".
 
In countries such as China, India, Indonesia and Saudi Arabia even the often dodgy official statistics show prices have risen by 8-10% over the past year; in Russia the rate is over 14%; in Argentina the true figure is 23% and in Venezuela it is 29%. If you measure the numbers correctly, two-thirds of the world's population will probably suffer double-digit rates of inflation this summer.