High Inflation - Don't blame U.S. alone!!

World is already bleeding under inflation, if Central banks cut interest rates more (to protect ecenomy drowing under recession), this will push inflation further up. That’s making the global response to inflation more complicated. European Central Banks are convinced of not decreasing rates further as they believe high inflation is a bigger threat than what credit crisis was!

World Bank estimated that global food prices have risen 83% over the past three years. The IMF forecast consumer prices in developing countries will rise 7.4% this year, and 2.6% in rich countries, the highest inflation rate since 1995. The 15 countries that share the euro currently see inflation of 3.5%, a decade high.

Some of the factors driving inflation vary from country to country: union-negotiated wage hikes in Germany, pork shortages in China, an electricity squeeze in South Africa, pay rises for civil servants in India. But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice is up 147% over the past year. Increasing demand for natural resources from India and China has pushed up prices for raw materials world-wide. Sky rocketing crude oil prices has increased fuel and transportation prices.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren’t facing recession. If they don’t, investors seeking higher returns would move money to these countries, placing upward pressure on their currencies. Hong Kong has mirrored the Fed’s recent rate cuts, igniting the local property market, that went up 31% from a year earlier in January, thus feeding inflation.

Economists believe that slowing growth in the U.S. and Europe will ease inflationary pressures globally. Also, current commodity prices are higher than what underlying demand can justify, and predict they could fall sharply. And, at some point, the Fed will stop cutting U.S. rates, helping arrest the decline in the dollar and the inflationary side-effects.