(with slightest updates)
Until recently, we thought that the spectre of inflation had faded away. Monetarist theses had triumphed. Central banks have become independent in most OECD countries to shield monetary policy from populist demands to abuse the printing press. Increased globalisation, keeping imports and consumer goods cheap while acting as disciplining force on wages and policies had a positive effect on prices. Inflation is historically, a nightmare: the role of the 1920s hyperinflation in the rise of Nazi Germany is well ascertained. It is also an economic headache – no, a chronic migraine: raising uncertainty over returns, thus acting as a brake to long-term investment decisions. Obviously, rising prices hit the poor most, and developing countries such as those in Latin America suffered enormously during the 1970s and 1980s from excessive levels of inflation. Since the 1990s, inflation has become much less of a concern, and only pariah states like Zimbabwe have been prone to hyperinflation. Until the “credit crunch” last year, the international economic press was rejoicing about an era of low inflation and low interest rates – pretty unprecedented in history – that contributed to the general borrowing binge ranging from “subprime” homebuyers in the US to all the emerging markets, and even poorer nations in Africa.
A recent paper by Gernot Pehnelt at ECIPE corroborated the thesis that globalisation contributes to keeping inflation down. The paper reminds us that
“the world has experienced a remarkable process of disinflation, with average inflation rates in industrialized countries falling by 10 percentage points and an even sharper decline of the mean rate of inflation in developing countries.”
In his study, Pehnelt focuses on the case of 20 OECD countries and looks at the relationship between their growing international economic integration and their inflation rates between 1980 and 2005. I’ll let you to the joys of working through the technical details of this econometric study. The result points clearly to a positive effect (checked for its robustness) of globalisation on disinflation – although admittedly it is not all.
Having said all that, we have recently found ourselves faced with a new outburst of inflation all over the world. The European Central Bank is fighting hard to keep its 2% target, emerging markets such as Russia are faced with two-digit inflation rates again, and along with China or Venezuela, they try to fight the spectre by introducing price controls, which are likely to fail (price controls on e.g. food lead to lower supply and a booming black market with skyrocketing prices, that hit most, whom do you think: the poor).
The culprit? Food and commodity prices Read the rest of this entry »