Much Ado About Nothing?

Despite slowing in key economies going out of 2006 and a dropping headline inflation rate policy makers in the G20 still seem to be very worried about inflationary pressures, or more accurately the rise in unit labour costs. Dave Altig has this story.

'What worries you most:  That the immediate future will bring slower than desired growth or higher than desired inflation?  If you answered "inflation", you are not alone.  Here's what the world's finance ministers and central bankers had to say after putting their heads together this past weekend:'

(from the G20 communiqué - also cited from Dave Altig's post) 

G-20 members noted that the world economy continues to expand at a solid pace, with growth above its long-term average for the fourth consecutive year. The outlook remains positive. Global economic growth is expected to slow slightly from the rapid pace of the past few years... Above average growth in the global economy has seen spare capacity decline which, combined with buoyant energy and mineral prices, has increased the risks to inflation.

So the ECB is definitely going to raise once more in December I guess and perhaps even again in the first quarter of 2007. But what about Bernanke and his lot? I mean, did not the last inflation release show that inflation was waning in the US, at least just a bit. Inflation in Japan is also on the downside, indeed scraping the bottom; see also here and here. Even in China the economy is cooling off. And in the Eurozone, well you know my stance here as I see the ECB going into 2007 without much clue about what is going on.

In all fairness, a big chunk of the inflation-scare also hinges on the perspetive of rising unit-labour cost which according to policy makers is likely to push up inflation. The bets are still out on this one since unit-labour costs don't display a direct transmission mechanism with inflation but still, as I show above the recent data shows that inflation is on the downside going into 2007