Inflation Fears Grow as Global Credit Pressures Continue

After the recent release of the national accounts revealed economic growth well beyond experts' predictions, fuelling concerns of inflationary pressures forcing up interest rates in late 2007, another cause for alarm has arisen, with global inflation pressure, particularly in China, causing significant anxiety.

Global wheat and oil prices hit record, or near-record, levels this week, while China revealed its highest inflation figures for more than ten years on the back of surging food prices.

This international inflation is causing considerable worries amongst central banks looking to lower interest rates to counter the effects of the 'credit crunch' caused by defaulting mortgages in the US after the subprime loans affair.

Banks are worried that they can't identify the greater threat: the credit squeeze causing recession or global inflation which would be exacerbated by any cuts in rates. Continuing increases in the price of crude oil, coupled with extreme increases in the price of wheat on the back of fears that the Australian drought will continue to affect the crop. Wheat prices have increased 350 percent over the past five years.

Also, international prices have been kept low for years, as cheap manufactured goods from China have flooded world markets. Inflation in China, particularly the rising cost of pork and other staple foods - the consumer price index rose last month to 6.5 per cent - in recent years is beginning to filter through to global economies.

Shane Oliver at AMP Capital believes inflation is less of a concern than impending recession, saying "they're (the US) going to have lots of excess capacity open up and you're already starting to see quite a lot of discounting come through in the US economy at the retail level and I think that's going to put a lot of downwards pressure on inflation going forward".

Even so, with the US Federal Reserve expected to cut rates again soon to bail out struggling markets on Wall Street, inflationary pressures will remain a concern.

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Published on September 9-th, 2007 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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