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Anditisn’tjustus。

EurozoneCPIisata16-yearhighof3。

6%,withproducerpriceinflationrunningat6%。

InAmerica,FederalReservechairmanBenBernankehasbeenfrettingabouthighheadlineinflation(whichincludesfoodandenergycostsandisnowrunningat3。

9%)pushingupinflationexpectationsandtheninflationitself。

Worse,thisinflationisnolongerconfinedtofuelandfoodprices。

Instead,asTimBondofBarclaysCapitalputsit,ithasbecome“virtuallyubiquitous”。

RecentBritishdatashowedthatgoodsandservicesinflationisacceleratingsharply(thoseindoubtshouldtrytakingatriptothedentist)andbothhereandinAmericabusinessesseemconfidenttheycanraiseprices。

ArecentsurveyinAmericashoweda“sharpincreaseinthebalanceofrespondentsintendingtoincreasetheirsellingprices”。

Readingslikethishaven’tbeenseensince1981,saysBond。

Normallyinrecessionarytimesbusinesseshavelittleconfidenceintheirabilitytomakepricerisesstick,soitisparticularlyworryingthatthesamekindofmurmuringsarecomingfromBritishbusinesses。

UKretailerscan’t“absorbthesecosts…forever”,saidaspokesmanfortheBritishRetailConsortiumlastweek,aroundthesametimeastheNationalFarmersUnionwaspointingoutthatrisingproductioncostshaveyettomaketheirwayintoshopprices。

Sowhat’spushingpricesup?

Themostobviousansweriscommodityprices,whichhaverisenmassivelyoverthelastfewyearsandwillprobablycontinuetodosooverthemediumterm。

There’sbeenmuchdebateinthelastmonthabouttheextenttowhichpriceshaveeitherbeendrivenbyspeculationorarereactingtofundamentaldrivers。

GeorgeSorossaysitisallaboutspeculationandthatpriceswillsoonfallback。

Otherssaystheactualimpactofspeculationistiny–“achipinthewoodpile”,asonebigAmericaninvestorputitthisweek。

Buthowmuchrecentpricemovesmayhavebeendrivenbyhedgefundsandfuturesbuyingisbythebyinthatitmakesnorealdifferencetotheunderlyingcaseforthecommoditiessupercycle。

Takeagriculture。

Grainpriceshadahugespikeearlierthisyearandhavefallenbacksince。

Butignorethevolatilityanditseemsclearthatthey’llstillendthisyearhigherthanlastandnextyearhigherthanthisyear。

Why?

Allsortsofreasons,includingrisingoilandfertiliserprices;growingconsumptionintheEast;agrowingglobalpopulation;productivity-dampeningprotectionismintheWest;watersupplyproblemsallovertheplace;and,ofcourse,thebonkersbiofuelspoliciestheAmericansandEuropeansrefusetogiveup。

Thesamesortofthingcanbesaidformostenergy-relatedandhardcommodities。

Yes,theymayhaverisentoofartoofastinthelastfewmonths,butthetightsupply-and-demandfundamentalsremainastheywere。

It’scomingwithblips,butthesupercycleisn’tanywherenearoveryet:“weare”,asJeffreySachssaysinFortune,“runningupagainstseriousresourceandecologicallimits”,which,giventhesizeoftheglobalpopulation(twobillionmorethan30yearsago),bindusevenmoretightlythantheydidinthe1970s。

Next,weneedtolooktoinflationlevelsinthedevelopingworld。

Thinkyou’vegotithardat3%?

SpareathoughtfortheRussians(12%),Vietnamese(21。

4%),Hungarians(9%),Chinese(8。

5%),Egyptians(16%),Bulgarians(16%),Ukrainians(29%)andtheArgentinians(officially8。

5%,butprobably20%plus)。

Whyisthishappening?

Partlybecauseofcommoditypriceshocks,ofcourse,butalso,saysJoachimFelsofMorganStanleyinTheDailyTelegraph,becauseofeasymoney。

“Weightedglobalinterestratesare4。

3%,whileglobalinflationisabove5%”,largelyduetothefastfallsinAmericaninterestratessinceSeptemberlastyear。

Inaggregate,“therealpolicyrateintheworldisnegative”,somethingthatmeansthattheworld’scentralbanks(andtheFedwithitsfranticratecuttinginparticular)are“bothfuellingandaccommodatingtheriseinfoodandenergyprices”。

Thisisnotaneasilyresolvablesituation。

AslongassomanycurrenciesremaininonewayandanotherpeggedtotheUSdollar,andhencetoAmericanmonetarypolicy,thereisn’treallymuchemergingeconomiescando。

Theycouldunpegtheircurrencies,but,asStephenKingnotesinTheIndependent,thisdidn’tworkforJapaninthelate1980s:theendresultwastemporarily-suppressed–notdefeated–inflation。

Thatleavesemerging-marketeconomieswithone“simplestrategy…it’scalled‘hopeandpray’”–anditdoesn’tveryoftenwork。

Allthismattersforus–partlybecauseduringthelastdecade’slongyearsofnationaldelusionthemainthingkeepingpricesdownhasbeenthelowcostofimportsfromdevelopingmarkets。

Butifpricesarerisingthere(notewageswererisingatanannualrateofmorethan20%inChinalastyear),soisthepriceofthoseimports。

ThisiscompoundedforusbytheongoingcollapseinthepoundandforAmericabytheweakdollar(importpricesintheUSroseatanannualrateofmorethan15%inApril)。

Italsomattersbecauseloosemonetarypolicy–andeconomicstrengthcombinedwithfast-risingwagesacrossAsia–meansthereisevenlessreasontothinkfoodandfuelpricesarecomingdownsoon。

ThepointI’mtryingtomakehereisthatourinflationrateinBritainisn’tjustaboutus。

It’saglobalthingandthatmakesitveryhardtodealwith。

Wecan’tdoanythingaboutUSmonetarypolicyandwecan’tdoanythingaboutwagerisesinChina。

Wecan’tdoanythingaboutfuelorfoodinflation,certainlynotintheshorttermanyway。

Inflationcouldperhapsbetamedbysharprisesinrealglobalinterestrates。

Butthatisn’tlookinglikely:sofar,asTimBondpointsout,theglobalpolicyreactionhasbeen“supine,consistingoflittlemorethanhotair”。

Willthischange?

Inthefaceofcollapsinghouseprices,economicslowdownandpressureforstimulus,willtheECB,theBankofEnglandandtheFedallstarttoraiseinterestrates?

Ican’tseeitmyself。

Sohowbadwillitget?

Hardtoknow,giventheeconomicuncertainties。

Butonethingthatshouldmakeusallworryisthedataoninflationexpectations。

Inthelastcoupleofquarters,thepercentageofAmericanandBritishconsumerswhoexpectinflationtoaverage5%ormorehassoared25%。

Thesearethehighestreadingssincetheearly1980s,whichshouldfocusthemindonwagepushinflation。

JamesFergusonthinksthisisn’tarisk(seeStagnation,yes–inflation?

Idon’tthinkso)。

I’mnotsosure。

ListentoRadio4inthemorningandmoreoftenthannotyou’llfindastorythatinvolvestheunions“workingwith”someorganisationorothertoraisethetotalpackagesofagroupofemployees。

Thisweektheywereworkingtobumpupcarallowancesfornurses。

They’vealsorecentlybeenworkingwithlocalcouncilemployeestogetabove-inflationsettlements。

Theyfailed,butGMBunionnationalsecretaryBrianStruttonisn’tgivingup。

“Ourmembersaresickofpayrisesthatdonotmatchthecostofliving。

IdonotbelievethatGMBmemberswillstomachanotherpaltryofferwhenweopennewpaynegotiationslaterthisyear。



Bravado?

Maybe,butconsiderthefactthatlastyearmorethanonemilliondayswerelosttoindustrialactioninBritainforthesecondtimeinadecadeandit’snotsomethingI’dbecomplacentabout。

Rightnow,itseemstomeallportfoliosshouldbepositionedforbothinflationandrecession。

SeeFourwaystobeatinflationforsomeideasonhowthismightbedone。

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