Global Inflation and Policy Responses

Romuald SemblatInternational Monetary Fund

June 2008

Global inflation is picking up, while growth is slowing down...

GDP Growth and Inflation

CPI Inflation(Y/Y percent change) (Y/Y percent change)

2007 2008 2009 2007 2008 2009

World 4.9 3.7 3.8 4.0 4.7 3.7

Advanced economies 2.7 1.3 1.3 2.1 2.6 2.0

United States 2.2 0.5 0.6 2.9 3.0 2.0

Euro area 2.6 1.3 1.1 2.1 2.7 1.9

Japan 2.1 1.4 1.5 0.0 0.6 1.3

7.9 6.7 6.6 6.3 7.4 5.6

Sources: IMF, WEO database; and staff estimates.

Real GDP Growth

Proj. Proj.

Emerging and developing economies

...especially in Asia, where inflation is picking up...

0

2

4

6

8

10

12

Jan-06

Mar

-06

May

-06

Jul-0

6

Sep-06

Nov-06

Jan-07

Mar

-07

May

-07

Jul-0

7

Sep-07

Nov-07

Jan-08

Mar

-08

NIEs ASEAN-5China India: WPI

Sources: CEIC Data Company Ltd; and IMF staff calculations.

Emerging Asia: Consumer Prices(12-month percentage change)

...And accelerating...

02468

101214161820

Jan-06

Mar

-06

May

-06

Jul-0

6

Sep-06

Nov-06

Jan-07

Mar

-07

May

-07

Jul-0

7

Sep-07

Nov-07

Jan-08

Mar

-08

NIEs ASEAN-5China India: WPI

Sources: CEIC Data Company Ltd; and IMF staff calculations.

Emerging Asia: Consumer Prices(3-month percent change of 3-mma, SAAR)

Core CPI inflation is also on the rise...

0

1

2

3

4

5

6

7

8

Jan-06

Mar

-06

May

-06

Jul-0

6

Sep-06

Nov-06

Jan-07

Mar

-07

May

-07

Jul-0

7

Sep-07

Nov-07

Jan-08

Mar

-08

NIEs ASEAN-5China India: WPI

Sources: CEIC Data Company Ltd; and IMF staff calculations.

Emerging Asia: Core CPI(12-month percentage change)

...And accelerating as well

-202468

1012141618

Jan-06

Mar

-06

May

-06

Jul-0

6

Sep-06

Nov-0

6

Jan-07

Mar

-07

May

-07

Jul-0

7

Sep-07

Nov-0

7

Jan-08

Mar

-08

NIEs ASEAN-5China India: WPI

Sources: CEIC Data Company Ltd; and IMF staff calculations.

Emerging Asia: Core CPI(3-month percent change of 3-mma, SAAR)

The main factor is the recent increase in commodity prices...

60

120

180

240

300

360

1/5/2004 5/5/2005 9/5/2006 1/5/2008 5/5/2009

Projections

Futures(dotted)

Metals

Oil (APSP)

1/ Food index is composed of barley, corn, soybean, soybean meal, soybean oil, pork, palm oil, sugar and wheat. Base metals index comprises aluminum, copper, lead, nickel, t in and zinc.

Daily Commodity Price Indices 1/(2004=100)

Food

...As demand for energy and commodities has remained robust...

• This reflect the strong global growth of the past few years, especially in emerging and developing economies, led by China and India

• These economies’ growth are more energy and commodity intensive than developed economies

... With most of the recent growth in oil demand coming from emerging and developing

economies...

...But there is few spare capacity...

40

50

60

70

80

90

1970 1976 1982 1988 1994 2000 2006

0

4

8

12

16

20Saudi Arabia Spare Capacity (RHS)

Others OPEC Spare Capacity (RHS)

Capacity LHS)

Demand (LHS)

Sources: British Petroleum Statistical Review , International Energy Agency, US Energy Information Administration and IMF Staff.

World Oil Demand, Production Capacity and Spare Capacity(million barrels a day)

projections

...And major supply constraints...

• Costs of investment in oil has increased significantly

• Investment in oil has not risen in real terms

• Food supply constraints as production costs and transport cost are rising

Policies may also have played a role on the demand side...

Oil subsidies prevent the pass-through of higher prices on demand and energy-saving measures

0

50

100

150

Industrial Asia Low-incomecountries

Emerging Asia Net Asian oilproducers

Gasoline 2/Diesel 2/Kerosene 2/ 3/

Petroleum Product Pass-through, 2003-20071

(In percent)

Sources: IMF, WEO database, and staff calculations.1 Absolute change in domestic retail prices, in US$, between end-2003 and end-2007 divided by absolute change in world prices over the same period. 2 Excludes New Zealand, Bhutan, Fiji, Mongolia, Myanmar, Samoa, Solomon Islands, Tonga, Vanuatu, and Brunei. 3 Excludes Australia, Singapore, China, Lao P.D.R., Malaysia, and Brunei.

...As well as on the supply side...

• On the supply side, national policies can affect negatively investments into new oil fields

• Biofuel policies are also spilling over to the price of key food items (corn and soybean)

...Finally, there may be also some financial factors

• The weakening of the dollar has influenced commodity prices

• The easing in US monetary policy has generated an easing in monetary conditions in countries with currencies linked to the dollar (Middle East and Asia) exacerbating general inflation pressures

So what can be done to tackle these problems ?

• Policies will need to adjust to the permanent relative price changes

• Policies will need to prevent second round inflation effects, and dampen inflationary expectations

• Advanced, emerging and developing economies can contribute in ensuring that demand and supply respond

First, demand has to respond to higher oil prices

• The changes in international oil prices should pass-through to the consumer, thereby ensuring a demand response and encouraging conservation

• At the same time, the most vulnerable groups should benefit from well-targeted policy supports

...And several other measures could be envisaged...

• Investment in the oil sector and energy resources should be encouraged. This would require ensuring stable and predictable investment regime

• Reducing the level of protections and subsidies for biofuels production

• Policies to encourage energy efficiency• Agricultural policies to increase production and

boost productivity

...But in the near-term, there is a critical role for macroeconomic policies

• Monetary policies are the main instrument to deal with rising inflationary pressures and dampen inflationary expectations

• In some cases, greater exchange rate flexibility and currency appreciation could provide support to monetary policy