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Inflation pressure building up, warns IMF economist

The world economy was powering ahead at a faster pace than was expected two months ago, building global inflationary pressures, said Simon Johnson, chief economist of the International Monetary Fund (IMF), yesterday. 

Inflationary dangers posed the greatest risk to the rosy world outlook but so far rapid gains in commodity prices, now spreading from metals and energy to food and agricultural products, had not pushed up consumer prices broadly, he said. “There are inflationary pressures when you run an economy this fast.” He forecast global growth of about 5% this year.

The US, Japan and Europe were no longer benefiting from falling prices for imported goods, which added to inflationary dangers associated with fast growth, he said. Despite these pressures, “we see very little inflation feeding through”. He expressed confidence that as long as major central banks focused on containing inflationary expectations, price risks should not unravel the robust outlook.

Recent bond price adjustments indicated that inflation would remain under control. Johnson said the steeper yield curve reflected higher expectations for higher nominal rates — or in the US Federal Reserve's case, no rate cut — not higher inflationary premiums.

The yield on 10-year US treasury notes rose above 5% this month for the first time since last July as investors scaled back expectations of a major US slump that would lead the Fed to cut rates from the 5,25% level. Similarly, 10-year European government yields have risen above 4,5% for the first time since late 2002 on robust data, which heighten chances for European Central Bank rates to rise above the present 4%. (