In its half-yearly report released today, the Paris-based economic thinktank the OECD had to acknowledge the inflationary flipside of globalisation. The booming economies of India and China have pushed up oil and commodity prices to record levels in a less benign aspect of globalisation, although they are coming off their highs in the current market sell-off.
Most mainstream economists sing the praises of globalisation. As developing countries such as India and China are integrated into the global economy, they become a source of cheap goods, from toys to shirts to computers. That keeps prices low for western consumers and helps to maintain a lid on inflation.
Thus low-cost economies such as China have had a "welcome disinflationary influence", in the words of the OECD:
Indeed, experience over the past three years suggests that commodity price pressures may significantly outweigh the disinflationary influence of low-cost manufacturing imports. This may be even more so going forward if protectionist pressures were to intensify.
There are practical consequences to all this.
One of the reasons why the world's stock markets went into reverse with a vengeance in recent weeks is the renewed anxiety over inflation. Recent data from the US revealed a higher level of inflation than expected. This immediately led to assumptions that the US Federal Reserve would have to keep raising interest rates instead of pausing, as had been widely expected.
A rise in interest rates would have the result of slowing down economic activity and hitting company profits. So when expectations of a halt in interest rate rises were dashed, investors took fright. Once sentiment shifted, other related worries came to the fore.
The US is saddled with a current account deficit, the broadest measure of trade, which comprises 7% of GDP, a figure economists consider unsustainable - 3% is seen as healthy. The administration thinks the best way to reduce the deficit is for the dollar to fall. Economists at Credit Suisse say the dollar would have to lose a fifth of its value for the current account deficit to reach 4.5% of GDP within two years.
A weaker dollar may help soak up the red ink, but it would create other problems. It would add to inflationary pressures. So Ben Bernanke, the new chairman of the Federal Reserve, is in an unenviable position. He will have to deal with the inflationary pressures from both globalisation and a falling dollar. Alan Greenspan sure picked a good time to get out.
