WSJ: Inflation's Bite Worsens Around World

We've only talked about this subject for about 150 posts in blog history; combine a World of Shortages with Western central banks who solve everything by injecting liquidity (paper money) into the system, sometimes at historic rates (thanks Uncle Ben!) and we were questioning why everyone was so happy with it (more rate cuts, more rate cuts!). No free lunches in the world, but the cruel reality is those who can afford it least (both in the US and worldwide) will be affected the most.

Again the good news for you Americans reading the blog, is we have very little inflation in America. This is a scourage that only affects the rest of the world (whew) As an aside most of the scuttlebutt of late is that the Federal Reserve has to raise rates - after all the futures market says so, so it must be. The same futures market DEMANDING Uncle Ben cut rates 3 months ago. Oh she is a fickle beast. Myself - I really doubt the POLITICALLY INDEPENDENT (ahem) Federal Reserve will raise rates ahead of the election. So if he does decide to pull a Volcker (increase rates into a slowing economy - err, no recession of course) it won't happen until after the election. If it happens before then... then you simply must say even the Federal Reserve does not believe the government's reports - which show little inflation ;).

• Inflation worries are heating up around the world and jolting financial markets in the process.
• On Tuesday, China's stock market was the latest to feel the blow, with the benchmark Shanghai Composite Index tumbling by 7.7%, to its lowest close this year. The drop came after the government announced steps to remove cash from the financial system in an attempt to tamp down inflation.
• Also Tuesday, officials in Vietnam effectively devalued their currency in a step aimed at easing market pressures related to soaring inflation rates.
• The price of the two year Treasury note, most sensitive to the Fed's moves, has fallen sharply (and its yield has risen) as investors grow convinced that the central bank may have to raise rates this autumn to contain inflation. On Tuesday, the two-year note's yield was 2.9%, up from 2.4% on Friday, marking a major jump in that rate.
• Meanwhile, the Bank of Canada surprised markets Tuesday by holding off on an expected interest-rate cut; the central bank said the risk of inflation, driven by high energy prices, had grown too great to allow for further rate cuts. The European Central Bank is also considering interest rate increases to fend off inflation.
• Developing economies -- some of which fought bruising battles to tame inflation in the 1980s and 1990s -- seem particularly vulnerable. Many economists started the year worried that the biggest threat facing these economies was weaker growth, in the wake of the U.S. slowdown. Instead, inflation is turning out to be a potentially thornier problem.
• A year ago, in a group of 24 large developing nations tracked by Bank of America, about three-quarters were either meeting or staying below their inflation targets. Today none of them are
• The typical way to fight inflation is to raise interest rates. But that tends to hurt economic growth and weighs on stock prices. It also complicates efforts by some developing markets to hold their currencies steady, an important mission because their economies tend to be export-driven.
• Skyrocketing energy and food prices are particularly acute for countries with large numbers of people living in poverty. But there are other inflationary forces at work which preceded the recent surge in commodity prices.
• Central banks across the developing world face a critical test. Many haven't taken aggressive steps to tighten monetary policy, say economists and investors, and have resorted to temporary measures like price controls on consumer goods such as flour and gasoline to tame inflation. Governments seeking to dial back costly subsidies risk angering their populaces.
• In several large emerging markets, double-digit inflation has already arrived or is expected shortly, including Russia, Turkey, South Africa, India, Indonesia, and the Philippines. In the last week alone, Russia, the Philippines, and Indonesia all raised their key interest rates. Even with the increases in interest rates, many governments -- especially those in Asia -- are still running policies that stimulate their economies. That's because their key policy rates are lower than inflation, which gives investors an incentive to borrow rather than to save.