NEWS / Foreign Exchange

Global inflation - where does the buck stop?

Oil prices are again setting new records and global inflation is ticking up once more. Global food prices are on the rise this time too, and for good reason - global food stocks have been falling for quite some time and are now very low. Meanwhile, unemployment is at a 25-year low, and this may fuel wage growth.

Central banks are facing an increasing dilemma, as inflation is still high and climbing, but growth is running out of steam. This combination means that the markets cannot be sure that central banks will support growth as much as they normally would. While this dilemma is not unusual at this juncture of the business cycle - where inflation is still being affected by the strong growth of recent years - the inflationary pres-sure from commodities is stronger than normal this time around. Central banks may take some comfort from the fact that core inflation (inflation excl. food and energy) is still low.

Hence, many central banks can claim that core inflation in their own country is low - or, in other words, that domestically driven inflation is relatively subdued. Is it not enough for central banks to focus on inflation at home? Perhaps. But this leaves the problem that no central bank will address globally-driven inflation. In-deed, individual central banks do not have much incentive to tackle global inflation, as this would involve enormous costs in the form of very much lower growth. This means that global inflation may not receive enough in the way of attention or action - and perhaps this is what we are seeing at the moment.