Jean-Claude Trichet: Rising commodities prices signal increasing inflation worldwide as Europe and Emerging markets start to see rise in CPI

Price inflation could cause economic havoc in Europe soon, considering the recent rise in food oil and other commodities.  Jean-Claude Trichet suggests that it could cause a raise in Euro interest rates.

Meanwhile, China, which has 1/6th of the world population, enjoys an official inflation rate above 5%, with food inflation above 10%.  The Fed seems fixated on CPI, which is a quasi housing index, considering that 40% of the index is composed of rental prices.  Given the sorry state of US housing, the index is downplaying what everyone is seeing right now at the grocery store. 

Trichet seems to acknowledge inflation as a possibility in Europe, while Bernanke seems to worry about the deflation monster.  Jean-Claude Trichet gives his concerns via and interview in the WSJ
While high unemployment and spare capacity are restraining underlying inflation pressures in the U.S. and elsewhere in the developed world, annual inflation in China is almost 5%—and a sizzling 9.8% economic growth rate in the fourth quarter triggered fears of more price pressures ahead. Inflation in Brazil is even higher.

With the global recovery still in its early stages, those moves could accelerate. Higher raw material prices, especially coal and iron ore, are pushing up steel prices across the globe. Steelmakers including AK Steel and Nucor in the U.S., and China's Baosteel and South Korea's Posco—the world's second and third largest—have been steadily increasing prices in recent weeks. The world average carbon-steel price is forecast to exceed $1,000 per metric ton by the second half of 2011, up from an average $733 last year, according to U.K.-based consultancy MEPS.

"All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects" on domestic prices, said Mr. Trichet in his office overlooking Frankfurt's financial district.

Global inflation isn't just coming from volatile commodities that track the ups and downs of the world economy. Fast-growing emerging nations are taking increasingly aggressive actions to beat back rising food prices as they grow more worried about threats to stability.

Last month, inflation unexpectedly jumped to 2.2% in the euro zone from 1.9%, the first time in more than two years it has exceeded the ECB's target of just below 2%. Some economists say it will rise above 2.5% in the next two months.


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