Paulson, Darling Face `Stagflation
Finance ministers from the world's richest nations face another week of inflation headlines after signaling concern that the global economy risks a dose of stagflation as commodity prices soar.
Officials from the Group of Eight ended talks in Osaka, Japan, on June 14 by saying record fuel and food costs threaten to spur inflation. They also pose a “serious challenge'' to growth, eclipsing the credit squeeze, the ministers said.
“Commodity prices have powered ahead of the financial crisis to become the number one priority of international policy makers,'' said Marco Annunziata, chief economist at Unicredit Markets and Investment Banking in London. “Stagflation is clearly the underlying, unspoken concern.''
After acknowledging policy making is “more complicated,'' the ministers' apprehension about an inflation outbreak may mount this week. Economists forecast reports to show consumer prices last month rose the most since 1997 in the U.K. and the fastest in 16 years in the euro area, while U.S. producer prices are predicted to have gained 1 percent from April.
The G-8 officials didn't propose any new policies, apart from promising to take “appropriate actions.'' They repeated their call of the past four years for producers to pump more crude and consumers to use it more efficiently.
`Strong Dollar'
The absence of central bankers meant there was no mention of currencies in their statement, although U.S. Treasury Secretary Henry Paulson backed a “strong dollar.''
The ministers met after the price of oil doubled in a year to an unprecedented $139.12 a barrel on June 6. Costs of foods such as wheat and rice have set records this year.
More expensive commodities create a dilemma for officials by sapping growth and spurring inflation, forcing them to decide which problem to address. The Organization for Economic Cooperation and Development this month predicted the weakest growth since 2002 this year and the fastest inflation in seven years.
French Finance Minister Christine Lagarde said today in Jeju, South Korea, that while the G-8 officials didn't discuss stagflation there is a “paradoxical challenge'' as policy makers “need to combat inflation and stimulate growth.''
“The predominant concern is the inflationary effect that oil in particular and also food prices are having,'' U.K. Chancellor of the Exchequer Alistair Darling said. Deputy German Finance Minister Thomas Mirow said oil's rise means “an enormous withdrawal of purchasing power.''
Letter to Darling
The global inflation picture may deteriorate this week. U.K. consumer prices probably jumped 3.2 percent in May from a year earlier, according to economists surveyed by Bloomberg News. That would be enough for Bank of England Governor Mervyn King to pen a letter of explanation to Darling, as required by law.
In the euro area, inflation is forecast to violate the European Central Bank's target of just below 2 percent for a ninth month by clocking 3.6 percent http://payday-badcredit.com.
Meantime, the U.S. Labor Department is predicted to say producer-price inflation accelerated, after it estimated last week that consumer prices increased 0.6 percent from April to May, more than economists anticipated. Canadian May household inflation is projected to rise the most since January.
“Inflation is the key theme this week,'' said James Knightley, an economist at ING Financial Markets in London.
Expansion Falters
At the same time, the global expansion is faltering. The World Bank last week predicted growth of 2.7 percent this year, a percentage point less than in 2007. The G-8 officials said “downside risks persist,'' citing declines in U.S. house prices and financial-market strains. Paulson said the cost of oil “risks prolonging the U.S. economic downturn.''
Central banks are increasingly choosing to focus on inflation after 10 months of supporting growth amid the credit squeeze. The Bank of Canada last week unexpectedly followed its U.K. counterpart in leaving its main interest rate unchanged. The Federal Reserve is predicted to hold its key rate at 2 percent next week after seven cuts since September. The European Central Bank may raise its rate next month by a quarter point to 4.25 percent.
Such wariness of inflation means few, if any, economists see a return to 1970s-style stagflation when unemployment and inflation entered double figures. Deutsche Bank AG said this month the fact that bankers won't let prices spiral and increased competition are reasons to consider the chance of stagflation is “fairly low.'' Prices often lag behind a slowdown of growth, they said.
Financial Markets
The G-8 ministers also indicated they are less worried that tight credit poses an obstacle to growth than they were when they met in April, noting conditions in financial markets have improved. Lagarde said there was also some “surprise'' at how resilient economic growth had proved.
The officials disagreed on what's propelling oil and told the IMF to study the topic. Paulson and Darling blamed constrained supply and robust demand, rebuffing Italian Finance Minister Giulio Tremonti's argument that speculation is behind it.
Ministers were also split over whether the dollar's 30 percent decline in trade-weighted terms since 2002 explains the surge in commodity costs. Lagarde and Russia's Alexei Kudrin suggested investors are buying oil and food as a hedge against the weaker dollar. Paulson said oil's gain had outpaced his currency's dive.
The dollar today ended a two-day gain against the euro after the G-8 stopped short of calling for it to strengthen. The U.S. currency traded at $1.5404 per euro at 12:28 p.m. in Tokyo from $1.5380 late June 13.
“The lack of any foreign exchange language may come as a slight disappointment for the dollar,'' said Sophia Drossos, a currency strategist at Morgan Stanley in New York.