Explaining the Pain

Unfortunately, there is little that individual rate hikes in the developed world could do to stem the rise of commodity prices in the face of strong emerging-market demand. Emerging markets should raise policy rates more significantly before a sharp upward shift in inflation expectations triggers a wage-price spiral. But more likely these economies—where the commodity price shock is breeding social turmoil—will be unwilling to tighten monetary policy enough and let their currency appreciate enough to control inflation. The slowdown in domestic growth that such deflationary policies would imply would compound the growth slowdown due to the G7 economic slump. The result may be a policy mistake that will lead to a rise in global inflation.
—Roubini is a professor of economics at the Stern School of Business at New York University and chairman of RGEMonitor.com; Pineda is an analyst at RGEMonitor.com.

© 2008