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May 20, 2008

Global Inflation Threat is Knocking on Our Door

Slowing GDP growth prospects and rising inflation have been the two main concerns for many countries in the last couple of months. In the US, the economy managed to avoid an outright contraction by a few basis points. The central bank has aided financial institutions, by means of providing and expanding liquidity.

Going forward, the future course of actions of monetary policy is more uncertain, as surging food and oil prices have come into the picture. The relatively high inflation is dictating direction now, while the word’s most powerful central banks are telegraphing the end of the interest-rate-cut-era and traders are already looking in the opposite direction.

The real danger of inflation is that fool and oil prices are rising so fast that inflation will replace costlier credit as the major threat to the global economy. Whether the Federal Reserve will look to move in the opposite direction and raise interest rates in order to avoid inflation risk is still hard to say, but given that Middle East and Asia are still driving the global economy and pushing food and oil prices higher, this scenario cannot be overruled.

Merrill Lynch & Co. forecasts global inflation will accelerate to 4.7% this year, the fastest pace since 1999, from 3.4% in 2007.

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