Inflation back after years of quiescence

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May 8: Inflation is reemerging as a threat to economic stability after years of ``quiescence,’’ and officials must be wary of policies that stoke consumer prices, the International Monetary Fund’s deputy chief said.

``This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability,’’ John Lipsky , the IMF’s first deputy managing director, said in a speech in New York today. A return to 1970s- style high inflation and rising price expectations ``cannot be discarded out of hand,’’ he said.

While the surge in energy and other commodity prices is the main cause of the danger, low central bank interest rates and a falling dollar are also contributing, Lipsky said. Speaking after the European Central Bank kept its main rate at a six-year high, the official said the inflation outlook ``appropriately is central’’ to European policy makers’ priorities.

In the U.S., as growth ``recovers,’’ consumer-price developments will ``assume greater importance’’ for the Federal Reserve, said Lipsky, a former JPMorgan Chase & Co. chief economist who joined the IMF in 2006.

``Low interest rates have a statistically significant impact on commodity prices’’ according to preliminary evidence, the IMF official said. ``Exchange-rate shifts also appear to influence commodity prices.’’

$25 Cheaper

IMF research indicates that if the dollar hadn’t fallen from 2002 to 2007, oil prices would be $25 a barrel lower.

Crude futures surpassed $120 a barrel this week for the first time. Commodity prices excluding fuel would be 12 percent lower, Lipsky said.

Middle East and Asian countries that keep their currencies linked to the dollar are seeing inflation pressures worsen as a result, Lipsky said.

``In the euro area, the sharp rise in inflation and concerns about potential deterioration in inflation expectations are dampening consumer confidence and spending,’’ he said. ``The inflation outlook appropriately is central to the ECB’s policy considerations.’’

The ECB earlier today left its benchmark interest rate at 4 percent.

``Policy prospects could shift, however, if inflation expectations remain well anchored and slowing growth reduces inflation pressures,’’ Lipsky said.

Record Levels

Crude oil prices have almost doubled in the past 12 months and commodities including corn, wheat, rice and soybeans have all reached records this year. In the U.S., consumer prices climbed 4 percent in March from a year before, up from a 2.8 percent rate in March 2007. Inflation in the 15-nation euro region accelerated to 3.6 percent two months ago, the fastest in almost 16 years.

``Inflation rates are expected to remain high for a rather protracted period of time before gradually declining again,’’ ECB President Jean-Claude Trichet said at a press conference in Athens today.

Fed officials anticipate that slowing U.S. economic growth and rising unemployment will help curb inflation. Policy makers last week signaled they’re ready for a pause in cutting rates after seven reductions since September.

Lipsky urged world policy makers to encourage investment in oil production, avoid trade protectionism and reduce subsidies for biofuels to help bring down energy and commodity costs.

Corn and soybean prices have risen in part because of subsidies in advanced countries for fuels derived from those commodities, Lipsky said.