Explaining the Pain

In sectors where very little trade takes place price inflation can be acute. Take rice. Rice prices have risen by roughly 70 percent in the past year, yet the underlying supply-and-demand equilibrium has not been disrupted to any great degree. Rice is one of the most thinly traded commodities, with only about 7 percent of production being sold internationally in recent years. Such a thinly traded market means factors other than changes to supply and demand—such as speculation or hoarding—can lead to disproportionate volatility.

Policymakers had a chance last month to make a significant contribution by establishing a more equitable and modern global trading system, with its important benefits in fighting inflation. Unfortunately, the trade ministers meeting in Geneva failed to agree on the Doha package of reforms that would have sharply reduced barriers to trade in agriculture and industrial goods. At a time when inflation threatens our future prosperity, they let this opportunity slip through their fingers.
—Lamyis director-general of the World Trade Organization.

A Conundrum Made In China
Stephen Roach advises emerging market policy makers to learn from the mistakes of the past and fight stagflation before its too late.

It had to end sometime. the disinflation of the past 25 years—a progressive reduction in the global inflation rate—is over.

Today's oil shocks, together with surging prices of industrial materials and agricultural commodities, are strikingly reminiscent of those that sparked the Great Inflation of the 1970s. Meanwhile, growth in the major economies of the industrial world is most assuredly stagnating. The U.S. has been on the brink of recession for six months, and the growth outlook is deteriorating in Japan and, more recently, Europe.

But there is a critical difference between today's stagflation risks and those of the 1970s, which started in rich industrial countries. Policy mistakes and an insidious wage-price spiral led most people to expect that inflation would keep rising, which then became a self-fulfilling prophecy. Now, it's no longer common in developed economies to index wages to inflation, and wages are restrained by structural (global competition) and cyclical (recessionary) forces.