Inflation and common man

Ronald Reagan once described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man.”

In countries such as China, India, Indonesia and Saudi Arabia even the often dodgy official statistics show prices have risen by 8 percent to 10 percent over the past year. If you measure the numbers correctly, two-thirds of the world’s population will probably suffer double-digit rates of inflation this summer.

Inflation rates of 3.9 percent in America and 3.3 percent in the euro area are far higher than central banks want, and inflation expectations are rising. Emerging economies shared some responsibility for America’s housing and credit bubble. As Asian economies and Middle East oil exporters ran large current-account surpluses, they piled up foreign reserves (mostly in American treasury securities) in order to prevent their currencies from rising. This pushed down bond yields.

At the same time, cheap imports from China and elsewhere helped central banks in rich economies hold down inflation while keeping short-term interest rates lower than in the past. Cheap money fueled America’s bubble.

Producers of natural resources have spent much of their profit on imports from Asia, replacing demand from the United States that has been ebbing as the subprime mortgage meltdown ripples through the economy.

The United States, Europe and Japan still bought just over 40 percent of Asian exports in 2007, but that was down from nearly 50 percent in 2000.

COMMODITY PRICES – HIGH AND
PERCENTAGE CHANGE FROM, 2008
High 15-May-08 % change from High
Agriculture
Corn 619.50 602.00 -2.80%
Wheat 1245.00 778.00 -37.50%
Rice 24.80 19.70 -20.60%
Soybean 1570.00 1362.00 -13.20%
Hogs 81.10 77.30 -4.60%
Sugar 15.20 11.10 -26.90%
Avg. -17.60%
Metals
Gold 1023.90 884.00 -13.70%
Silver 20.80 16.80 -19.20%
Aluminum 3189.30 3010.00 -5.60%
Nickel 50700.00 26550.00 -47.60%
Tin 25150.00 25150.00 0.00%
Copper 8730.00 8125.00 -6.90%
Avg. -15.50%
Energy
Oil 127.30 125.00 -1.80%
Natural gas 11.80 11.60 -1.60%
Gasoline 322.80 318.00 -1.50%
Heating oil 372.30 363.80 -2.30%
Avg. -1.80%
Notes: The high represents the high reached this year, except for
nickel for which the high was made in May 2007
Source: Bloomberg

World inflation is broadly composed of three commodities: energy, agriculture and metals (both precious and other metals).
world per capita growth exceeded 3.5 per cent per annum (purchasing power parity data) during these years ��� a level not seen since the 1960s. So the pattern, until 2008, has been of high economic growth, high increase in commodity prices and low individual country inflation!

Exports to Russia, meanwhile, are growing about 60 percent a year and sales to the Middle East are rising at a 35 percent clip. Statistics indicate that the global GDP increased in the last five years at an average rate of 4.5% annually. the world map of household expenditure has varied. In North America for instance, households earmark less than 15 percent of their budget for food, compared with 50 percent in the poorest countries. However, everything has changed. The increase in wheat prices pushed the price of bread up by 30%. In the Eurozone (the ex-15), food inflation reached 6.5%, the highest since 1997, when economic indicators were first created. As for the inflation rate in the Euro zone as a whole, it stood at 3.3% last April, higher than the 2% ceiling set by the European Central Bank (ECB).

According to the World Food Program, an additional 100 million people have joined the ranks of the world’s 850-million-hungry people, while the global financial contributions are enough to buy 40% less food compared with 10 months ago. Even more, in the estimates of analysts, food price inflation is said to rob Bangladeshi families that live on $5 a day of $1.5. In the US, an additional 1.5 million people will need food coupons, bringing the total to 28 million.

The oil prices frenzy has also contributed to the spiraling inflation. Agriculture is heavily dependent on fossil fuel, whether in planting, harvesting, storing or even with respect to fertilization. According to estimates, the production of one calorie of food needs 10 calories of fossil fuel, while the production of one kilogram of cattle meat requires 10 kilograms of cereals.

The Economist says double-digit price rises are about to afflict two-thirds of the world’s population. Already, “in countries such as China, India, Indonesia and Saudi Arabia even the often dodgy official statistics show prices have risen by 8-10 per cent over the past year; in Russia the rate is over 14 per cent; in Argentina the true figure is 23 per cent and in Venezuela it is 29 per cent.”

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