Explaining the Pain

We have seen this movie before, in the 1970s, when developed countries allowed oil-price increases to turn into general inflation. And we've seen the sequel too: the early 1980s, when it took years of high interest rates and recession to get rid of inflation. We need to learn from this history.

There are actions we can take to ease the pain of those hit hardest by food and fuel price rises. Well-targeted income support can ease the burden of relative price changes on the poorest citizens. Support from donors and multilateral institutions, including the IMF, which I head, can ease the burden on the poorest countries.

In time, high prices will stimulate development of new sources of supply to feed the world and power the global economy. The challenge for governments and multilateral institutions is to help people get through the current period of dislocation without resorting to policies that would produce inflation, and therefore undermine global stability and growth.
—Strauss-Kahnis managing director of the International Monetary Fund.

How The Doha Collapse Hurts
Pascal Lamy , fresh from the failed world trade negotiations, explains why less free trade will only exacerbate price increases.

Fighting the scourge of global inflation is primarily the responsibility of central bankers and finance ministers wielding monetary and fiscal tools to keep price rises in check. But trade can help too.

Trade can transmit price changes across borders, and while it is true that this can spread higher prices across countries, there is also evidence to suggest that opening trade can reduce price levels through greater competition among producers. Lowering tariffs has the potential to bring prices down, which is why in the current food crisis, more than 20 countries have unilaterally cut their import duties. Policies that distort trade, including tariff peaks and agriculture subsidies, can have consequences for price stability as well. Though subsidies may push down prices in the short term, in the longer term they drive producers from the market—especially in developing countries—while discouraging necessary investment and innovation in the agricultural sector.