Inflationary pressures have continued to mount throughout many regions of the world over the past few months, while global economic growth has continued to slow. Yet, stocks both here and abroad are showing some signs of stabilizing after falling sharply over the past two months.
However, my research indicates that we’re not yet out of the woods and that stocks could fall considerably further in the months ahead if oil prices continue to rise and central banks around the world don’t implement additional actions to combat inflation.
Inflation has been the most pronounced in the world’s emerging economies and in countries that peg their currencies to the U.S. dollar. For example, consumer prices rose at a year-over-year rate of 5.6 percent in Brazil during May, and 7.7 percent in both China and India. Although inflation data is not yet available for countries in the Middle East, most of whom peg their currencies to the U.S. dollar, the latest economic statistics out of Saudi Arabia indicate that consumer prices there rose at an annual rate of 10.5 percent in April. Inflation rates have also been rising in Japan, which is virtually unheard of.
Yet, economic growth in those countries has slowed considerably over the past few quarters. For example, Brazil’s total output of goods and services rose at a year-over-year rate of 5.8 percent in the first quarter of this year, versus 6.2 percent in the prior quarter. Meanwhile, Japan’s economy expanded at an annual rate of only 1.3 percent in the quarter ended March 31, versus 1.7 percent in each of the previous two quarters.
Although China’s and India’s economies have continued to expand at a healthy rate, China’s GDP grew at an annual rate of 10.6 percent in the first quarter of this year, compared to 11.2 percent in the prior quarter, and an 11-year high of 11.9 percent in the second quarter of 2006. India’s economy grew 8.8 percent in the first three months of this year, down considerably from its recent high of 10.1 percent in the third quarter of 2006. More importantly, growth in China and India has slowed in each of the past two quarters at the same time that both consumer and industrial prices have gone through the roof.
My research indicates that inflationary pressures will continue to mount in the years ahead as the world’s emerging economies continue to increase their consumption of oil, coal, industrial metals, textiles, and food products. However, I expect inflation rates to moderate somewhat over the next couple of quarters in response to the ongoing worldwide economic slowdown.
If, however, the U.S. Federal Reserve does not soon implement actions to decrease the money supply and raise short-term interest rates, my research indicates that oil prices could continue to rise and that inflation rates will in turn continue to rise throughout the world.
On a more positive note, recent trading activity in the interest rate futures markets indicates that the Fed will increase interest rates later this year. Meanwhile, China recently reduced its subsidies on petroleum products, which could lead to an interim decline in oil prices.
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