G20 policymakers, at odds over smoothing over global economic imbalances, confront a new threat as higher inflation ripples from emerging markets to advanced economies.
Reports on Thursday that US inflation rose at a faster-than--expected pace followed a jump in the European cost-of-living index to a two-year high and a pickup in Chinese prices, further fraying a tentative global consensus over how to sustain the recovery.
“We clearly need to keep inflation at bay,” French Finance Minister Christine Lagarde, host of yesterday’s G20 meeting in Paris, told Bloomberg TV’s Francine Lacqua. “Too much inflation is not going to be conducive to growth.”
Higher inflation in the industrialized world has driven up central bank interest rates in Canada, and momentum built this week for the Bank of England to follow suit after the central bank forecast inflation would quicken from a two-year high and peak at about 4.4 percent.
Among the G20’s up-and-coming powers, China, Brazil, India, Indonesia and South Korea have raised borrowing costs this year, while rates have declined in Turkey.
Underscoring rising prices in the fastest-growing economies, the average cost of credit-default swaps tied to the debt of the BRIC nations — Brazil, Russia, India and China — is about 47 basis points more than those of the G7, near a four-month high, according to data provider CMA. That’s up from a record low 18 basis points on Jan. 5.
With China, the emerging world’s dynamo, four months into a rate-rise cycle to put a lid on surging inflation, the specter of higher prices casts a political as well as an economic shadow over the two-year-old global upturn.
Dairy, sugar and grain costs spurred food prices to another record last month, and the World Bank this week said that climb had pushed 44 million more people into “extreme” poverty.
“The problem is much more fundamental in terms of the supply and demand, the need for more investment for more technology,” Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development, said in a Bloomberg TV interview.
G20 finance ministers and central bankers come to Paris with diminished ambitions, with French President Nicolas Sarkozy no longer talking of a relaunch of the global monetary system to knock the greenback off its perch as he did last year.
“We need a system that functions better,” Bank of Canada Governor Mark Carney said at an Institute of International Finance conference in Paris.
The current monetary order “is an increasingly unstable hybrid of fixed and floating exchange-rate regimes. It promoted in our opinion the enormous buildup of debt that preceded the crisis,” he said.
One ingredient would be a greater stake for the yuan, possibly by making it a component of the IMF’s special drawing rights, once seen as an alternative reserve asset to the dollar. That system is next up for review in 2015.
China is facing renewed pressure to push up the yuan, even though it has allowed the currency to strengthen 3.6 percent since a two-year US dollar peg was scrapped on June 19.
“China should look into experiences of other countries,” Mexican central bank Governor Agustin Carstens told Bloomberg TV.
People’s Bank of China Governor Zhou Xiaochuan (周小川) said the government didn’t heed the complaints.
“We never really cared about external pressure,” Zhou told reporters in Paris. “We always focus more on domestic development.”
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