The strength of the inflationary pulse that seems to be emerging around the world is striking, albeit that one can argue it is being driven by an external commodity price shock, which is a once-off, relative price shift that will not perpetuate ongoing inflationary effects (to my mind this is an heroic interpretation). The other claimed mitigant is the significant surfeit of excess labour supply in some countries, which would appear to rule out wage-price spirals.
Of course, Australia does not have the luxury of a large 'output gap' like the US and UK. On the inflation front, we face the worst of all worlds: positive external price shocks combined with budding internal price pressures.
So in those developed countries with output gaps, is one then left with a repeat of the 1970s 'stagflation' in the event that central banks face stubbornly sticky inflation resulting from secular food price rises, feeding (no pun intended) back into consumer inflation expectations, and imported inflation via, say, higher Chinese input (labour and raw material) costs and strategic currency depreciation by the countries in question (eg, the US and UK)?
The much more interesting question is arguably this: will developed world central banks, which have for the last two decades hailed the success of their 'inflation targeting' regimes, have the stomach to normalise their interest rates in an environment when fiscal policy is working in the other direction, and growth may slow and unemployment remain at uncomfortably high levels with the consequence that sovereign indebtedness will also increase? Will monetary policy in these nations remain truly independent of the polity, or will it continue to be co-opted into this process of 'budgetisation' (eg, wherein the Fed and BoE print money and effectively engage in fiscal policy)?
A crude survey shows that, at the very least, the following countries are currently struggling with worrying above-target headline inflation problems, which, in some cases, are feeding back into consumer expectations of future price rises: China; India; Indonesia; Brazil; Chile; South Korea; Thailand; Norway; The Eurozone; The UK; Serbia; and Poland. This is the central banker's nightmare: a once-off inflationary shock results in permanently higher inflation due to a rise in people's expectations of future period price increases. We are already starting to see some evidence of this in Australia, as I noted in the posts below.
It pays to remember here that in the 'inflation-targeting' world, central banks have to deliver 'headline' inflation within target, not the 'core' analytical measures that conveniently strip out high growth inputs.
