Evercore Pan Asset

As some commentators continue to worry about worldwide deflation the evidence mounts that most of the world is experiencing inflation. In India inflation is well into double figures and the monetary authorities are well behind the curve to control it. Wages are leaping up. China has official inflation of just 3%, but there too the pressures are upwards and the authorities have been wrestling with booming house prices and accelerating wages for some months. Other emerging market economies also have rising inflation from low levels. In the US overall inflation remains subdued, but it is a positive number.

In the UK the RPI has been rising by 5.3% and CPI inflation is well over target despite all the Bank of England’s promises of returning to below target. They still believe that output is well below capacity so there cannot be inflation on their model. They should get out more. World output, especially in manufacturing, now depends on the world wide supply chain. The UK does not have an insulated manufacturing economy which will reflect the depressed overall levels of GDP. Wages, which have been growing as little as 1% in the private sector, are now on the rise to 2% plus. Strikes are more common as employees fight against a further decline in living standards.
 
Raw material prices took off in 2009 following the slump, and continued to rise strongly well into 2010. The UK has to pay higher prices for metals, oil and other basics like everyone else, and has to pay even more thanks to the sharp depreciation of the pound last year and in the first months of this. Now higher levels of demand in the emerging markets and in the West is leading to price increases of components and manufactured parts, with shortages appearing already. Some components are being rationed, with foundry capacity stretched.

It is true there is deflation in the problem countries of Euroland. Highly borrowed countries locked into the single currency have to slash their costs to have any chance of competing, as they cannot devalue. In countries like Ireland and Greece rents and wages are falling as they experience the pressure of trying to live with the common exchange rate. Elsewhere countries prefer to attempt the devaluation route, with a race to the bottom in currency markets. This too is inflationary for the successful in this policy.

There will be individual countries that experience deflation as they seek to cut their spending and control their debts. However, the larger and faster growing economies now have an inflation problem. Euroland is a special case thanks to the stresses in the system. The world market is transmitting inflation around the system through material and component prices. That is why now some countries are raising interest rates or withdrawing liquidity. The world has run into capacity shortages very early in this Western cycle. It should remind the Bank of England and some commentators that we can no longer assess our inflation on domestic considerations alone. In many areas it is a world market. Raw materials and people are footloose.

Meanwhile the continuing US anger about the Gulf oil spill is leading to more restrictive policies on drilling for new oil. This is another pressure in the system for future higher oil prices.