Not stagflation, but growthflation

Stagflation: The stagflationists are losing the argument. The world is inflating and that is indeed a worry. But inflation is coming from growth that seems increasingly strong and from money that is looking far too loose for a reviving world. The risk is that oil and other commodities soar much higher now, as they did in 2008, only this time the spike may not recede quickly.

Ben Bernanke, the US Federal Reserve chairman, cannot be held responsible for social unrest in developing countries. But there is a link between ultra-loose money and global commodity and asset prices. The Fed has successfully pursued an ultra-loose monetary policy to help avert a second Depression. But the $600 billion second round of US money printing looks a precautionary overdose whose inflationary influence is widespread. Oil at close to $100 per barrel is injecting inflation into the world economy. Political unrest is a factor, but it is secondary. Food and other commodity prices - less sensitive to Middle Eastern unrest - are also surging. Global price hikes are now a big risk.

The cause? The US and most Western economies are out of their hole and joining in emerging economies' growth fest. January’s ISM report on the huge services sector of the US economy showed the strongest figure since August 2005 and input prices roaring ahead. There are problems here for both developed and developing economies. As Charles Bean, deputy governor of the Bank of England, said this week, if external inflation is very strong, the central bank will have little choice but to clamp harder on domestic sources of inflation - even in a still weakly recovering economy like the UK. Jean-Claude Trichet, president of the European Central Bank, talked down expectations of a rate increase on February 3, suggesting energy-driven inflation would be transitory. If the world is indeed gathering steam, he may be wrong.

Australia’s central bank has just raised its growth forecast for the coming years. Rates are rising around the globe. China, India and Brazil have tightened, and now so has Indonesia. The West will have to follow. For inflated asset markets, there will be risks. But the shift from ultra-loose to tighter monetary policy is going to have to happen soon.