Stephan Roach is chairman of Morgan Stanley Asia, and pens this missive for the FT, in which he contextualizes why the Fed’s options are limited:
"Fears of 1970s-style stagflation
are back in the air. Global bond markets are growing ever more nervous
over this possibility, and US and European central bankers are talking
increasingly tough about the perils of mounting inflation.
today’s stagflation risks are very different from those that wreaked
such havoc 35 years ago. Unlike in that earlier period, wages in the
developed economies have been delinked from prices. That all but
eliminates the automatic indexation features of the once dreaded
wage-price spiral – perhaps the most insidious feature of the “great
inflation” of the 1970s. Moreover, as the stunning surge of the US
unemployment rate in May suggests, slowing economic growth in the
industrial economies is likely to open up further slack in labour
markets, thereby putting downward cyclical pressure on wages over the
next couple of years.
But there is a new threat to global
inflation that was not present in the 1970s. It is arising from the
developing world, especially in Asia, where price pressures are
lurching out of control. For developing Asia as a whole, consumer price
index inflation hit 7.5 per cent in April 2008, close to a 9½-year high
and more than double the 3.6 per cent pace of a year ago. Sure, a good
portion of the recent acceleration in pricing is a result of food and
energy – critically important components of household budgets in poorer
countries and yet items that many analysts mistakenly remove to get a
cleaner read on underlying inflation. But even the residual, or “core”,
inflation rate in developing Asia surged to 3.8 per cent in April, more
than double the 1.8 per cent pace of a year ago…"
If memory serves, Roach worked for the Fed (under Arthur Burns) in the 1970s, and is very familiar with how they operate in the face of rising prices: First Denial, then Panic, then Acceptance. I think we’ve seen the first two in spades so far . . .
The new stagflation: an Asian export
FT, June 12 2008 18:54 | Last updated: June 12 2008 18:54