Explaining the Pain

Prevent The Worst Of All Worlds
Dominique Strauss-Kahn , on how rich and poor nations must work together to make sure commodities inflation doesn't snowball.

It is obvious why we should care about the rise in the price of some goods. Ask an ocean fisherman or a long-haul trucker about the rapid rise in oil prices. Ask a mother in Africa about soaring food costs that mean she can only afford one bowl of rice a day for her children. Recent increases in oil and food prices have hit many people hard, and the poorest people hardest.

But often when we read about inflation—a general increase in prices and wages—it seems like a more abstract problem and a less serious one. Some might say that a general increase in both prices and wages would help the poor by redistributing the pain of prices in food and fuel. Others say its more important to continue supporting growth, rather than fighting inflation. It's growth that will keep jobs safe and allow families in the developing world to escape from poverty.

In fact, allowing the current price increases in fuel and food products to be translated into a broader increase in inflation would be the worst of all worlds. It wouldn't help the trucker or the African mother. Oil and food prices have increased relative to other goods because demand for them has increased and supply hasn't. Solving that problem requires more food production, new sources of energy and greater energy efficiency. Inflation delays that adjustment: while high food and energy prices send a clear signal to producers to produce more, the signal is muffled by more general price increases.

It would also stunt growth. The foundation of growth is trust between savers and investors. Savers must be confident that their gains won't be wiped out by inflation. Otherwise they will demand a higher return, and investment and growth will fall.

Finally, it would hurt the poor. It's wage earners who lose most when the value of money falls. Millionaires are usually well protected against inflation.