Inflation, a world problem – the US, China and the Middle East.

The world is really feeling the pressure of booming oil prices especially as oil reached a new record closing at over $100 a barrel. The world economy is facing a slowdown and inflation is beginning to bite in countries around the world.

The world’s largest oil consumer, the US, is hurting because it relies on imports to feed the demand. The stalling of growth coupled with the increasing price pressures seem to be pointing to the US slipping into stagflation. As the subprime crisis dampens consumer spending the price of imported goods are also becoming more expensive because of the dollar’s weakness. The International Monetary Fund has downgraded its forecast for US growth to 1.5% for this year and indications are that the US is on the verge of a recession.

As it has often been said the US is the globe’s economic engine room and all this slowdown will have flow through effects for the world economy. The World Bank has signaled that the growth rate for the world economy is expected to slow down this year.

China is the second largest trading partner of the US but the World Bank’s new chief economist and senior vice president Justin Yifu Lin is quoted by the Xinhua agency as saying that he feels that the problems experienced by the US would have a limited impact in China as most Chinese imports were low and middle end.

In spite of this China has its own set of problems. The consumer price index (CPI) grew in January from 6.5 % in December to an 11 year high of 7.1%. The worst snowstorms in recent history caused food prices to rise dramatically by 18.2% in January and affected vegetable, pork and poultry prices. The shortages may lead to ongoing CPI increasing through February and March. As producers pass the on the additional costs to consumers this will also have an inflationary effect on domestic and overseas consumers. The supply problems are forecast to ease in the latter part of the year as production resumes its natural patterns.

Monetary policy undoubtedly will be tightened to cool down the economy and bring down inflation. The global slowdown will affect demand for Chinese products but the Chinese government could counter this by stimulating internal demand by the judicious use of fiscal stimulus measures such as the recent amendment to the tax levy threshold and the 30 billion yuan ($4.2 billion) worth of “certificate treasury bonds” to be issued on the beginning of March.

In the Middle East the oil price rises have had unexpected consequences. While the boom has increased the wealth of the ruling class, the increased cost have led to price rises for food and other consumer goods and the removal of fuel subsidies, affecting the middle classes. This has been reported by Robert F. Worth of the International Herald Tribune in an interesting article yesterday. He points to the inflation rate rising in Saudi Arabia from virtually zero to 6.5% and this creating ongoing internal tensions. He also examines other Middle East nations where this is happening. Worth further posits that this divide in class wealth is causing underlying violence and is being “overlooked as a factor in some recent clashes that were seen as political or sectarian. ” Ironically, the Middle East’s dependence on food imports is making it vulnerable to the global rise in commodity prices.

Inflation then, is really becoming a challenge that the economies of the world are facing and the rises in oil prices are having consequences not only for the nations dependent on oil but also flowing back into the oil producing nations. How the “economic engine room economies” such as the US, China and India fare in these difficult times will have ripple effects through the rest of the economies that trade with them.

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~ by abstraktbiblos on Monday, 25 February, 2008.

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