Gonzalo Perez-Seoane, President WM
The rising price of energy (oil) and food inflation is making progress toward the four corners of the planet. Without that data is dramatic moment in any case the trend ways, or points storm.
With the departure of inflation, analysis and development is becoming a recurring theme in many economic debates. The reality is that the debate is wide because inflation still has no unanimous answer to the current economic doctrine. According to change the name of the Nobel Prize or economic power, change the response. The origin, behavior and transmission of inflation continues to be a deep black hole of macroeconomics, non-trivial issue because it leads to divergent positions on monetary policy (central banks) and policies (governments). But some kind of role plays inflation in the current global economy?. If so, to this crisis should add a budding new challenge, what effects will arise from the reversal of global inflation in the present monetary situation will not calm?.
It is plausible that the loss of purchasing power of major currencies is at the origin or has led to the rise of commodity prices. Among them, for their economic impact, oil and derivatives. The relationship between the increase or decrease in the relative purchasing power of the dollar and oil, is well known. It is also well known that the rise in oil prices has a direct impact on inflation, and their impact on emerging economies higher than developed economies.
But the abrupt rise in inflation may have, in my opinion, a more profound and delicate in every nation, changes its “inflation differential.” What is the inflation differential?. Countries compete in terms of relative prices. Thus and therefore, the anger, all referred to in the Obama Administration with the Chinese government in the wake of the undervaluation of the yuan, which rewards the clever and competitive China punishes fairplay U.S. currency. When raising inflation in each country, not only adversely affects the purchasing power of its citizens (middle class, pensioners ..), but also affects its external competitiveness. Thus, the inflation differential is critical vector in the economic system (in a global context) and because it affects the relative competitiveness between productive systems and that affects or moves in a positive or negative external cash flows (savings) and thereby higher or lower investment and growth (Solow model). The inflation differential tends to be corrected through free variation of exchange rates, although the process is imperfect and always damaging in the short term those who hold high inflation differential (negative).
From another perspective one could say that the inflation differential is an extraordinary competitive strength, largely pilot changes in GDP of each nation. In countries that maintain low inflation differential economic growth will accelerate, though in direct detriment of the nations worst positioned in this variable (less competitive). The statements can be extrapolated to the EU and as the source of the lamentable lack of competitiveness of Spain and others, versus the New Covenant of competitiveness that after a decade of Euro now occurred to them to implement the “brilliant European leaders (business systems rigid generate higher relative inflation). Furthermore, this negative externality be extrapolated globally important source of global economic desconvergencia process or “North-South Effect.” If all countries had the same inflation risk, the possibility of global economic convergence would be true some day.
From the standpoint of monetary inflation differential is the variable that specify short-term monetary and economic policy of a country against all monetary and economic policies of other countries with which they trade and compete. It is a dynamic variable exogenous to the domestic querrer. Is usually affected by short-term monetary policy, and economic policies (production) in the medium and long term. What is important in macroeconomics is not inflation itself but the inflation differential, contrary to the hypothesis that maintains the European Central Bank. The optimal inflation to search for each Central Bank does exist when the optimal inflation differential, being all a moving target and not static. The well known criterion of 2% inflation rate the ECB would, according to the above, wrong.
Given that any policy on inflation is directly related to interest rate policy, the question is how to govern a disparate inflation monetary area?. The ECB faces a serious dilemma for monetary policy. Trinchet Perhaps it was quick to deny it, and putting a band where it is not yet visible wound (January 13). The EU is not much here to uncontrollable inflation monetarily if some member countries are tripping (PIIGS and new members, Romania, Bulgaria …). Occur, the ECB will have to decide whether to continue without moving the interest rate in the short term, or move to curb rising inflationary pressure and expectations change is coming to the entire eurozone. Also have to decide whether to continue its policy of buying bonds directly or through the Stability Fund (indifferent), and thereby maintain stable and if possible reduce long-term rates of PIIGS (copy of the fact by the Fed.) If interest rates rise in the short and / or policy restricts its purchases of bonds, causing intense damage to the economic recovery of the PIIGS (inflationary countries except for Ireland in deflation), which will face even greater social sacrifice and perhaps on the threshold of sovereign debt default. The ECB is trapped in a cage can not get out. The dilemma is not the cage. The dilemma is that no door key. Do you break the lock (the Euro )?.
It could be concluded that with the onset of inflation, the global crisis has changed. The crisis has entered its second phase. A slow global economic recovery has come a new challenge. Unfortunately the most difficult among the possible global inflation. Global inflation born of the strong currency depreciation has been cast as traditional commodities and penalties from spinning now rich countries among the emerging and existing among all countries. Global inflation that could boost the fledgling currency war and also give new spirit to challenge the dollar as reserve currency of the global financial system. The year 2011 will sentence was where tip the balance.