Growth is slowing in all regions of the world, and inflation is rising, but the International Monetary Fund's No. 2 person in charge says a repeat of the 1970s stagflation period isn't likely.
IMF First Deputy Managing Director John Lipsky said the "inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability," Bloomberg News reported Thursday. However, Lipsky added that a return to 1970s-style stagflation isn't likely, but it cannot be totally ruled out.
Oil, commodity-rooted inflation
Further, Lipsky underscored that the current inflation rise is being driven by a fundamental increase in demand for commodities, primarily oil, and to a lesser extent by supply constraints around the world, Thomson Financial reported Thursday via Forbes.com. Hence, the recent price increases are likely to prove finite, Lipsky added, unless these items keep rising more rapidly than other items.
Economist David H. Wang told BloggingStocks Thursday he agreed with Lipsky's categorization of the most-recent rise in inflation but added that government subsidies may prevent a pullback in commodity prices, especially oil. Classic economic theory holds that as the price of a good rises, people will use less of it. However, governments in China, Venezuela and the Middle East, among other nations, subsidize gasoline/fuel, lowering its cost, which discourages conservation, Wang said. The United States does not subsidize motor fuel at the federal level, but individual states do subsidize heating oil/natural gas for low-income citizens.
Further, to the extent that subsidies boost demand and maintain commodity prices, they delay the hoped-for commodity price retreat, clouding the price landscape for monetary policy officials. "Subsidies create a sort of gray area between inflation driven by the price of some goods and inflation due to cost and wage increases throughout the entire economy," Wang said.
Put another way, central bankers have to ask, "Is oil demand and the $100 oil price a permanent or a cyclical phenomenon?" Wang said. "If it's permanent, central bankers have to be at the ready to clamp-down on inflation. If it's cyclical, they have more leeway to ease interest rates to stimulate economic growth. Subsidies can mask a cyclical rise and make it look permanent, and that's where the problem lies."
