G8 hits impasse on inflation

Tuesday June 17

The threat of inflation to the global economy, coupled with slowing economic growth, has created a conflicting situation for economic policy responses. The complexity of the ensuing situation was exemplified last weekend when G8 finance ministers failed to reach consensus on the causes and solutions for rising inflation.

The G8 communiqué expressed 'strong concern' over the sharp rise in oil prices, which ministers noted have surpassed past peaks both in nominal and real terms, and the impact on global macro-economic stability, human welfare and development prospects.

However, there was uncertainty over the causes of the problem and how to tackle it.  Any hope that the G8 meeting would result in coordinated monetary action -- or concerted intervention in foreign exchange markets -- to counter rises, principally in commodity prices, was dispelled by their failure to agree on the phenomenon's underlying causes.

The G8 communiqué noted that elevated oil prices "fundamentally reflect rising world demand and supply constraints" as well as other elements such as "geopolitical concerns and financial factors".

However, comments made by individual ministers during the Osaka meeting suggested that some of them consider 'financial factors' to include speculation in oil markets and the weakness of the US dollar as significant contributors to high oil, and, to a lesser extent, food prices.

Yet in briefings after the meeting, both Paulson and IMF Managing Director Dominique Strauss-Kahn rejected the analysis that speculation was the leading cause. Their view holds that rapidly rising commodity prices are linked to conditions in the real economy as demand is very close to maximum supply, thus placing upward pressure on prices.

And, despite concerns expressed in the run up to the Osaka meeting that dollar devaluation is another factor behind commodity price inflation G8 ministers steered away from discussion on exchange rates.

Due to the lack of consensus, they have stated the need for further study:

• They called on the IMF and International Energy Agency (IEA) to work together with national authorities to carry out further analysis of "real and financial factors" behind the recent surge in oil and commodity prices.

• Likewise, they asked the World Bank to examine the effect on development of recent sharp rises in prices of basic food staples.