Global Inflation E-mail
Written by Brenda Velez   

In the next Newsweek, in the international edition, Senior Editor Rana Foroohar reports on why globalization, which used to be all about making things cheaper, has led to half the world living with double-digit inflation. Between 2003 and 2007, world GDP grew 5 percent per year-faster than it ever has. But freer trade, cheaper emerging-market labor, better technology and prosperity, made everyone from consumers to policy makers to the bankers financing it forget that this unprecedented growth came with greater global demand for things such as labor, food and energy.

And now, for the first time in 35 years, the world is facing a serious, and synchronized, surge in inflation. The fact that so much in the global economy has changed since the last major bout of inflation makes it difficult to predict what the exact fallout will be. It's not clear how inflation will affect global growth, but it won't be pretty. Seminal studies by Stanley Fischer and Robert Barro suggest that the impact really starts to kick in after inflation rises above the range of 5 to 7 percent (the global average is now 5.5 percent). The IMF is predicting that global growth this year will be about 4 percent, a full point lower than last, in large part because of inflationary effects. All of this underscores just how complex is the new economic order.

Newsweek asked several economic leaders and experts to lay out the inflation problem and discuss how to fix it. A sampling: Dominique Strauss-Kahn, managing director of the International Monetary Fund: "There are actions we can take to ease the pain of those hit hardest by food and fuel price rises. Well-targeted income support can ease the burden of relative price changes on the poorest citizens. Support from donors and multilateral institutions, including the IMF, which I head, can ease the burden on the poorest countries."

Stephen Roach, chairman of Morgan Stanley Asia: "The U.S. has been on the brink of recession for six months, and the growth outlook is deteriorating in Japan and, more recently, Europe. But there is a critical difference between today's stagflation risks and those of the 1970s, which started in rich industrial countries. Policy mistakes and an insidious wage-price spiral led most people to expect that inflation would keep rising, which then became a self-fulfilling prophecy. Now, it's no longer common in developed economies to index wages to inflation, and wages are restrained by structural (global competition) and cyclical (recessionary) forces."

Jeffrey Garten, the Juan Trippe Professor of international trade and finance at the Yale School of Management: "My vote is to attack inflation first, foremost and decisively. Ultimately uncontrolled price increases will fall hardest on the poor and vulnerable, and soaring prices will only create a situation in which the ultimate medicine will be even more painful than it would be today. Moreover, it is crucial to head off inflation before the expectation of price increases becomes a self-fulfilling prophecy for companies pricing their products and workers pushing for raises."

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