Inflation in emerging economies

An old enemy rears its head

Emerging economies risk repeating the same mistakes that the developed world made in the inflationary 1970s

See article

Readers' comments




The central banks --backed by their governments-- are ultimately responsible for inflation. The rising costs of natural resources, demands for higher wages and "inflationary expectations" are the results of inflation, not its causes. Why? Because only the central banks control the money supply, and they have been issuing fiat money for many decades now.It's sad to read in The Economist articles written by people who won't acknowledge this.


hearttouch wrote:
May 23, 2008 04:59
Federal Reserve has printed so much money to buy services and goods around the world, especially in emerging economy. Those central banks have to print more local currencies to exchange dollars flowing in. Later, these central banks have to lend US more money by buying its national debt. It's clear that US Fedral Reserve and other major central banks act as the ultimate source for world inflation.

These emerging market central banks are under no obligations to keep their rates pegged, so the Fed does not oblige them to buy US dollars and thus US debt. In fact, the reverse is true -- the Fed wants emerging market central banks to float their currencies as it relieves pressure on US producers.

The more a nation produces, the more it can consume. With an overvalued currency, Americans cannot produce competitively. And people in tough economic times, believing it is only temporary, will borrow money to keep on going. Right now, it does not surprise me that Americans are under greater consumer debt. Yes, there are people who buy needless things, but according to Kathleen Newman (professor of sociology at Princeton), 1/3rd of Americans live precariously. These are the people who live paycheck to paycheck, at risk of losing healthcare or don't have healthcare.

This is the same precariousness that many Americans felt in the 80's when another Asian economy artificially kept its currency cheap (Japan). It helped Japan's export sector, but the boom in exports prevented competitive pressures in the service sector to form. Today, Japan has a two tier economy where exporters are strong but the service sector is weak. The manipulation has a legacy in America, where services (that is not export-able) had to thrive because the export sector was weak. The same might happen to China. In addition, when the yuan does appreciate strongly, it's dollar reserves won't decline in dollar-terms, but it will decline in yuan-terms. Thus, China will have to make huge write-offs in billions of dollars. That has got to be a burden on their banking system (and guess what, it was such a burden in Japan -- recall the 1990's banking mess there).

As Adam Smith pointed out, the invisible hand is prices. If foreign countries are going to manipulate prices, then their whole economy (and the economy of the country their fixing their currency against) is mis-aligned. And this price-fixing has also allowed the Bush administration to continue with its failed policies as Asian banks funding US debt holds interest rates down for Bush to continue his policies. If he wanted war, and no one funded him, then he would have to raise taxes (reducing his political support), or rates in America would have to be super high so people can save (and have their savings used to fund Bush's war). So, Asia's exchange rate policies has even retarded America's political process.


First, measure inflation in a satisfactory way. Almost all ways of measuring inflation necessarily contain large distortions, except for the following simple procedure:1. Measure the inflation rate for EVERYTHING2. Take the median valueThe quality of this method is demonstrated by the fact that it tends to predict countries' inflation rates (measured in the usual distorted ways) about 6 months ahead.I'm sorry to be rude to fellow readers here - but if you're happy with distorted measures of inflation, then you're a MUG.


Real danger world is facing is over population and scaricity of every thing including food,enegry and other raw materials.This arise from extra technological progress.mostly responsible is the western culture.
From ancient time western civilazation based on fear. so they constantly searching new way to conquire this fear.Today also they are trying their best to improve health of mankind. I alway wonder is it possible to conquire the nature? If we conquire nature, what terrible conquence happen.Today we are suffering from pollution, food shortage,if we behave this way what will happen tomorrow.
My requist to mainly western people including scientists please stop new research, be not give challange to nature, keep blance in nature.Be humble, you are not great compare to nature there is so much entropy in nature nature is so secrete, just understand GOD IS ALWAYS PLAYING DICE, so not be think yourself greater than nature.


At least we can see the pornographic interest rates that plagues Brazil, this beg the question, Until when we are going to be forced to finance othes irresponsible countries ?


When you refer to 'America' do you mean the continent or the 'United States of America?'Please be specific--I find this to be a common fault among many Economist articles.


In India, I think the rise in food price can be attributed to a supply side constraint owing to the changing eating habits and increased consumption across sections of society and the futures trading on commodities rather than an increase in fuel prices. Diesel is highly subsidised and its been quite a while since the last price revision took place.

In India, the inflation is calculated on the wholesale price index and in comparision to inflation figures of other countries, are we comparing apples and oranges as the underlying method of each country is different.


Sir Munzoenix, thanks for your economic lesson. I guess your theory is absolutely right provided the reality of life can be ignored.

"according to Kathleen Newman (professor of sociology at Princeton), 1/3rd of Americans live precariously"

I guess the real problem arises from here, the huge gap between the living standard between people in developed countries and emerging countries. People in these two different economies produce differnt value of goods and services with the same consumption of resources. When you say "precarious",that may be a happy life for other people in emerging economy by their standard. The people in US just consume too much by borrowing money from banks. The invisible hand will have to fill that black hole at the end of days. The real thing has to be aligned is somewhat the living standard instead of price. The wide acceptance of US dollar supported by US credibility ensures its paper can buy something real around the world. The economic tie has flourished emerming econmy as well as US consumers. Poor people can sell more of their labour to earn a bit more, rich people can enjoy more by paying less. That's sort of process of "shrinkage of the living standard gap". Of course there is no obligation for anyone or country to sell or buy something. That's all for mutual benefit. To allow the currency freely appreciate to obey Fed's rule will just impoverish most emerging economy. they will just hold large reserve of paper dollars but depreciated drastically. that's sort of "robbery". This robbery is strategically implemented by US now so as the maintian the "gap". To absurdly blame other countries' policy to protect their own economy and society for retarding US politics is somewhat childish. Children like to shed off resposibilities and are reluctant to retrospecting, but always pressing for more givings from others.


I can't read some of the first few paragraphs because of an advertisement covering the text. Clicking "close" on the ad does not make it go away.




This so called inflation is really affecting people in the third world. The prices of essential commodities has skyrocketted way beyond ones initial thougt.In Zambia,my homeland the price of mealie meal has risen from K37,500 in march to K48,000 in this month. The price of a five litre container of cooking oil has risen fom K35,000 to K54,000 this month. Much to the dismay of our politician who are saying that all is well. This is equivalent to murder. Murder of the poor people in society.Its like going to the hospital feeling an flu, headache and stomach pains, only to be told by the doctor that you are in perfect health.


It's a pity that since last year US Fed is taking callous look towards the commodity bubble. They are printing more money, weakening dollar and propping up the Wall Street using taxpayers' money. US Fed is responsible for the commodity bubble that exporting inflation worldwide.We all are paying the cost of preventing a recession!


Inflation is directly related to changes in money supply, defined in the widest terms. Banks and central banks must keep control and we are now paying the price for the profligacy of the past 7 years. Hopefully after this bout of inflation which is inevitable the banks will have in place regulations which will prevent the huge explosion in the balance sheets (including off balance sheet items) of financial institutions. Bankers greed,both personal and corporate, cost our economies us dearly.


SirA small technical point in an otherwise highly illuminating article, you said:"When central banks intervene in the foreign-exchange market to prevent a currency appreciating, they have to print money to buy dollars, which boosts domestic liquidity."This liquidity can be eliminated (or sterilised) by issuing government debt.Unfortunately when I raised this point 20 years ago in a letter to the FT I wrote "sterilised" and for some reason the quotation marks stuck - which has been a bit of an ongoing giggle.


The race to the bottom in world currencies is prompting a competitive race to the bottom in the tax systems too, so, the countries can't face anymore their social obligations, specially social security and health care. This combinations is like nitro and glycerin, explosive, a new deal must be made to accommodate it, unless we will see tough times ahead. As far as I can see, the most qualified forum to do this is the Doha talks.


regarding fiat money, i don't have much knowledge in it, but it seems to me instead of fixing real ills of our financial system such as recent financial crisis we just think that expansionary monetary policy can fix it.Sure it does, temporarily and then we are left to deal with erosion of our incomes and stagflation.


The inflationary is already coming,though I was worried about its negative effection deeply,someone around me seem like never care about.

I hope that correspongding people who able to rise some forum can open a world-wide discussion so that a well-planed scheme could give to handle problems caused by inflationary.


Measuring everything is certainly a sound basis for understanding inflationary pressures. The challenge is the relevance of each item. Falling prices for plasma screens and satnavs may be important for some and irrelevant for others.Presumably publishing all the measured items would allow individuals to estimate their own spending habits and create a 'Personal Inflation Index'.For anyone who couldn't be bothered they could just note whatever index took their fancy!



Products and events


Take our weekly news quiz to stay on top of the headlines

