IMF worries that commodities may not be a bubble

IMF Warns on Global Inflation

By Krishna Guha, Javier Blas,
Chris Giles, and Ralph Atkins
Financial Times, London
Thursday, May 8, 2008

http://www.ft.com/cms/s/0/f30215fc-1d3d-11dd-82ae-000077b07658.html

Global inflation has re-emerged as a major threat to the world economy, the International Monetary Fund said on Thursday in a stark warning that marked an abrupt change of tone from its emphasis on the risks to growth.

John Lipsky, IMF deputy managing director, said "inflation concerns have resurfaced after years of quiescence" due to soaring energy and food prices. Mr Lipsky said global growth was slowing but headline inflation was "accelerating."

The IMF warning came as crude oil prices hit a record of almost $124 a barrel, up 99 per cent in the past 12 months, and customers scrambled to take out insurance against prices rising above $200 a barrel.

In an indication the commodities boom may not be the bubble imagined, Mr Lipsky said the forces pushing prices up "appear to be fundamental in nature" -- and these were being amplified by lower US interest rates and the dollar's decline.

He was "optimistic" that there would not be a repeat of the early 1970s, when increasing energy prices ushered in a period of rising inflation expectations and accelerating inflation, but he said this risk "cannot be discarded out of hand."

Mr Lipsky said policymakers must respond aggressively to any sign of rising inflation expectations "lest the impressive gains in global stability attained in recent years be sacrificed."

The IMF's inflation warning was reinforced by European central bankers, as the European Central Bank and Bank of England left interest rates unchanged despite increasing signs of economic weakness.

The eurozone was "experiencing a rather protracted period of high annual rates of inflation," Jean-Claude Trichet, ECB president said. It was "imperative" that the households and companies did not think inflation rates were normal and raise prices and wages accordingly.

The Bank of England rejected calls from representatives of the increasingly sickly housing market for lower interest rates, maintaining its rate at 5 per cent. The monetary policy committee felt the increasing tension between rising inflation and lower growth did not allow it to cut rates twice in successive months.

The majority on the MPC are cautious cutting interest rates aggressively as inflation is moving increasingly above the bank's 2 per cent target would send the wrong signal about its determination not to allow higher inflation to become ingrained again in British society.

The switch in emphasis from the IMF from growth to inflation follows the latest surge in the price of oil.

Mr Lipsky suggested part of this could be due to monetary policy and exchange rates. He said IMF research suggests low interest rates effect commodity prices "above and beyond the traditional effect of increased demand" while the decline in the dollar since 2002 was responsible for about $25 of the increase in the oil price.

The IMF warned food prices would stay high for the foreseeable future.

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