account
search
search

Economic Outlook: Discretionary drought

By ANTHONY HALL, United Press International   |   Sept. 4, 2012 at 10:54 AM
| License Photo
http://cdnph.upi.com/sv/em/i/UPI-35381346770447/2012/1/12843809188049/Economic-Outlook-Discretionary-drought.jpg
The worry about inflation is an economic paradox: Too little inflation is almost as bad as too much. Prices going backwards can be very painful.

The Organization for Economic Cooperation and Development, a research-oriented think-tank for 30 powerful economies, said Tuesday the rate of inflation in the OECD area rose at an annual rate of 1.9 percent in July, down from 2 percent in June.

The slowing inflation rate "reflects slower growth in energy and food prices," the OECD said. Energy prices by themselves rose just 0.7 percent in July, down from 1.4 percent in June. Food prices in July "slowed to 2.3 percent ... the lowest rate since September 2009," the report said.

Food inflation slowed from June, when the annual rate was 2.8 percent. And then there's "core inflation" which is all prices with energy and food data excluded. Core inflation came to 1.8 percent in July.

By itself, low inflation is a blessing, especially when unemployment is running high. The problem is, inflation is the very definition of opportunism: Prices don't rise, because they can't rise. This is not inflation at rest. This is economic anemia.

Furthermore, there are several signs pointing to a possible inflation jolt in the next year. Severe drought beset much of the corn and wheat growing areas in the United States as well as the bread basket of Eastern Europe. The prices of corn, wheat and soybeans have already run rampant this summer, up 25 percent, 25 percent and 17 percent, respectively, from June to July, the World Bank Group reported last week.

From July 2011 to July 2012, the World Bank's Food Price Index, a measure of prices among internationally traded food commodities, was 6 percent higher than in July of last year. Cyclical in nature, it was also 1 percent higher than the previous peak of February 2011, the World Bank said.

Crude oil prices started the year at $100 per barrel and spent most of last week hovering around $96 per barrel.

That sounds positive. But the Group of Seven Nations recently issued a statement that urged oil-producing countries to increase production if possible to keep global inventories from dropping. They also thanked Saudi Arabia for pledging to increase production to ward off a tightening of supplies.

The biggest issue is the oil business embargo against Iran. With the United States leading the charge, much of Europe and several Asian nations have joined the effort to shun Iranian oil until the issue of its alleged nuclear weapons program can be resolved.

Investors in Europe and the United States, meanwhile, are waiting for word from the European Central Bank and the Federal Reserve on the next step for economic stimulus.

By now it must be clear these central banks are on their own. For all the interlocking political dynamics in Europe -- Germany, most critically, has been opposed to an ECB bond-buying spree -- almost no one in Europe mentions stimulus efforts provided by sovereign governments anymore.

While the sentiment shifted away from belt-tightening austerity budgeting -- and several influential international organizations have denounced that strategy -- there has been little to no effort to revise a program of governments providing stimulus to their economies.

Here's how it works -- or doesn't work, as the case may be: A modestly struggling government cuts back on spending to bring debts in line with European Commission standards with the expectation that this will convince investors their bonds are solid moneymakers.

But the governments that cut back on construction projects, scientific research and education, and freeze wages and hiring have just put the brakes on their own economies and interfered with tax revenue growth.

A year or two later, the International Monetary Fund and others denounce the austerity strategy as a failure.

Looking at how much stimulus these countries can now put back into the economy and the answer is zero. Unemployment did not improve in the past year and tax revenues are falling because they've slowed their economies down.

Governments, like households, used to have discretionary funds. Governments, like households, tend to spend what they have available.

It all gets back to the paradox that very few appreciate. Hard times is when you spend, not save. Good times is when you save, not spend.

In international markets the Nikkei 225 index in Japan was flat, falling 0.1 percent while the Shanghai composite index in China lost 0.75 percent. The Hang Seng index in Hong Kong gave up 0.66 percent while the Sensex in India rose 0.32 percent.

The S&P/ASX 200 in Australia shed 0.61 percent.

In midday trading in Europe, the FTSE 100 index in Britain lost 0.85 percent while the DAX 30 in Germany dropped 0.31 percent. The CAC 40 in France fell 0.61 percent while the Stoxx Europe 600 fell 0.5 percent.

Related UPI Stories
© 2012 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
x
Feedback