G-20 Stung by Faster Inflation as Imbalance Dispute Rages

Group of 20 policy makers, at odds over smoothing over global economic imbalances, confront a new threat as higher inflation ripples from emerging markets to advanced economies.

A report of greater-than-expected U.S. inflation yesterday followed a jump in the European cost-of-living index to a two- year high and a pickup in Chinese prices, further fraying a tentative global consensus over how to sustain the recovery.

“We clearly need to keep inflation at bay,” French Finance Minister Christine Lagarde, host of today’s G-20 meeting in Paris, told Bloomberg Television’s Francine Lacqua. “Too much inflation is not going to be conducive to growth.”

Rising consumer prices, a byproduct of the recovery from the worst recession since World War II as commodity costs surge, have put higher interest rates back on the agenda as the rich world grapples with a debt overhang and developing countries try to escape the boom-bust syndrome.

U.S. year-on-year inflation accelerated to 1.6 percent in January, the highest since May, figures showed yesterday. The euro area’s January rate of 2.4 percent was the fastest since October 2008, skidding past the European Central Bank’s 2 percent target ceiling.

Higher inflation in the industrialized world has driven up central bank interest rates in Canada, and momentum built this week for the Bank of England to follow suit after the central bank forecast inflation will quicken from a two-year high and peak at about 4.4 percent.

Rates Raised
Among the G-20’s up-and-coming powers, China, Brazil, India, Indonesia and South Korea have raised borrowing costs this year, while rates have declined in Turkey.

With China, the emerging world’s dynamo, four months into a rate-rise cycle to put a lid on surging inflation, the specter of higher prices casts a political as well as an economic shadow over the two-year-old global upturn.

A burst in food prices was behind the democratic uprising in Tunisia, spilling over to Egypt and neighboring Arab countries with the potential to remake the balance of power in the Middle East.

Dairy, sugar and grain costs spurred food prices to another record last month, and the World Bank this week said that climb has pushed 44 million more people into “extreme” poverty. Oil prices last month reached the highest level since 2008.

‘Fundamental Problem’
“The problem is much more fundamental in terms of the supply and demand, the need for more investment for more technology,” Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said in a Bloomberg Television interview yesterday. “We need for agriculture to become an attractive business again.”

G-20 finance ministers and central bankers come to Paris with diminished ambitions, with French President Nicolas Sarkozy no longer talking of a relaunch of the global monetary system to knock the U.S. dollar off its perch as he did last year.

“We need a system that functions better,” Bank of Canada Governor Mark Carney said at an Institute of International Finance conference in Paris yesterday. The current monetary order “is an increasingly unstable hybrid of fixed and floating exchange-rate regimes. It promoted in our opinion the enormous buildup of debt that preceded the crisis.”

One ingredient would be a greater stake for China’s currency, the yuan, possibly by making it a component of the International Monetary Fund’s special drawing rights, once seen as an alternative reserve asset to the dollar. That system is next up for review in 2015.

China Currency
China is facing renewed pressure to push up the yuan, even though it has allowed the currency to strengthen 3.6 percent since a two-year dollar peg was scrapped on June 19.

“China should look into experiences of other countries,” Mexican central bank Governor Agustin Carstens told Bloomberg Television in Paris yesterday. “Some Asian economies should defeat the fear of floating by looking into successful events for example, like Chile, Mexico, Brazil.”

The yuan remains undervalued, a U.S. official told reporters in Washington this week. Trans-Pacific unease over currencies underlies the G-20’s November pledge to “move toward more market-determined exchange rate systems” without singling out China or setting a timeline.

The aim of the Paris meeting, which starts tonight and ends tomorrow afternoon, is to edge toward an agreement on the use of economic indicators to monitor the skewed trade and financial flows that pitched the world into crisis.

Geithner’s Call
China and Germany, the world’s two biggest exporters, fended off U.S. Treasury Secretary Timothy F. Geithner’s call in October for current-account surpluses or deficits to be capped at 4 percent of gross domestic product.

European Union officials want the scorecard to include the current-account balance, public deficit and debt, savings ratio, net foreign assets, reserve adequacy, real effective exchange rate and private date, according to an EU position paper.

Closer surveillance comes as the economic recovery in the U.S. and Europe edges the world closer to equilibrium. China’s trade surplus, for example, narrowed for the second year in 2010, to $183 billion.

“Global imbalances have been falling for some time,” Morgan Stanley economists Manoj Pradhan and Alan Taylor said in a Feb. 16 report. “While cyclical factors have clearly played a role of late, we believe that deeper fundamental drivers are still the more important factors.”