Roach: This Time, Stagflation is Different
Today's stagflation, sharply rising inflation in a time of slow growth, differs from that experienced in the U.S. more than 30 years ago, says Morgan Stanley Asia CEO Stephen Roach.
Like everything we buy these days, this stagflation comes from Asia and is driven by globalization — as well as by an Asian inflation rate that's rapidly lurching out of control.
“The world remains largely in denial over the outbreak of a new strain of stagflation,” Roach writes in the Financial Times.
“Given Asia’s role as producer to the world, the globalization of trade flows is the new transmission mechanism of worldwide inflation that was not evident in the 1970s.”
Overall exports should hit a record 32.5 percent of world gross domestic product in 2008, far higher than the 21 percent of 1980, when the inflation then was nearing its peak, Roach points out.
Lowering inflation in the developing world depends on lowering food and fuel costs, something that hasn’t happened in six straight years. Depending on currency adjustments to reduce inflation is unrealistic, too, because Asia’s export-led economies don’t want to risk growth by raising interest rates.
The result? Slowing economic growth in the industrial economies will likely put more people out of work and create fewer jobs, pushing down wages even further, says Roach.
"Wages in the developed economies have been de-linked from prices," Roach maintains. "That all but eliminates the automatic indexation features of the once dreaded wage-price spiral, perhaps the most insidious feature of the 'great inflation' of the 1970s."
Consumer price inflation in developing Asia, where hyper-fast growth is viewed as a positive by the aspiring middle class, hit 7.5 percent in April. That's more than double the 3.6 percent pace of a year ago.
The problem is especially visible in China, where the 8.3 percent average annual inflation rate over the past four months shows the sharpest sustained increase on a year-on-year basis since the mid 1990s.
China’s inflation problem isn't just rising food and energy costs, either.
While it’s true that much of the recent price hikes are in food and energy, Roach says, even core inflation in developing Asia surged to 3.8 percent in April, more than double the 1.8 percent pace of a year ago.
Minimum wage increases and negative real short-term interest rates brought on by a policy lending rate below headline inflation also contribute to what Roach describes as “an ominous increase in Chinese inflationary expectations,” eerily reminiscent of those in the developed world in the 1970s and early 1980s.
Roach says that central banks, however, are keeping short-term interest rates far too low to combat inflation throughout most of Asia.
“For developing Asia as a whole, a GDP-weighted average of policy rates is currently about 6.75 percent, fully three-quarters of a percentage point below the 7.5 percent headline inflation rate,” Roach writes.
“The longer such a trend persists, the more wrenching the monetary tightening required to arrest it — and the greater the risk of a subsequent hard landing.”