JEJU South Korea - Bloomberg


Finance ministers from the world's richest nations face another week of inflation headlines after signaling concern that the global economy risks a dose of stagflation as commodity prices soar.

Officials from the Group of Eight ended talks in Osaka Japan Saturday by saying record fuel and food costs threaten to spur inflation. They also pose a “serious challenge” to growth eclipsing the credit squeeze the ministers said.

“Commodity prices have powered ahead of the financial crisis to become the number one priority of international policy makers” said Marco Annunziata chief economist at Unicredit Markets and Investment Banking in London. “Stagflation is clearly the underlying unspoken concern.”

After acknowledging policy making is “more complicated” the ministers' apprehension about an inflation outbreak may mount this week. Economists forecast reports to show consumer prices last month rose the most since 1997 in Britain and the fastest in 16 years in the euro area while U.S. producer prices are predicted to have gained 1 percent from April.

The G-8 officials did not propose any new policies apart from promising to take “appropriate actions.” They repeated their call of the past four years for producers to pump more crude and consumers to use it more efficiently.

Commodity boom:

The absence of central bankers meant there was no mention of currencies in their statement although U.S. Treasury Secretary Henry Paulson backed a “strong dollar.”

The ministers met after the price of oil doubled in a year to an unprecedented $139.12 a barrel June 6. Costs of foods such as wheat and rice have set records this year.

More expensive commodities create a dilemma for officials by sapping growth and spurring inflation forcing them to decide which problem to address. The Organization for Economic Cooperation and Development this month predicted the weakest growth since 2002 this year and the fastest inflation in seven years.

French Finance Minister Christine Lagarde said yesterday in Jeju South Korea that while the G-8 officials didn't discuss stagflation there is a “paradoxical challenge” as policy makers “need to combat inflation and stimulate growth.”

“The predominant concern is the inflationary effect that oil in particular and also food prices are having” U.K. Chancellor of the Exchequer Alistair Darling said. Deputy German Finance Minister Thomas Mirow said oil's rise means “an enormous withdrawal of purchasing power.”

The global inflation picture may deteriorate this week. British consumer prices probably jumped 3.2 percent in May from a year earlier according to economists surveyed by Bloomberg News. That would be enough for Bank of England Governor Mervyn King to pen a letter of explanation to Darling as required by law.

In the euro area inflation is forecast to violate the European Central Bank's target of just below 2 percent for a ninth month by clocking 3.6 percent.

Meantime the U.S. Labor Department is predicted to say producer-price inflation accelerated after it estimated last week that consumer prices increased 0.6 percent from April to May. Canadian May household inflation is projected to rise the most since January.

“Inflation is the aaa theme this week” said James Knightley an economist at ING Financial Markets in London.

Faltering expansion:

At the same time the global expansion is faltering. The World Bank last week predicted growth of 2.7 percent this year a percentage point less than in 2007. The G-8 officials said “downside risks persist” citing declines in U.S. house prices and financial-market strains. Paulson said the cost of oil “risks prolonging the U.S. economic downturn.”

Central banks are increasingly choosing to focus on inflation after 10 months of supporting growth amid the credit squeeze. The Bank of Canada last week unexpectedly followed its U.K. counterpart in leaving its main interest rate unchanged. The Federal Reserve is predicted to hold its aaa rate at 2 percent next week after seven cuts since September. The European Central Bank may raise its rate next month by a quarter point to 4.25 percent.

Such wariness of inflation means few if any economists see a return to 1970s-style stagflation when unemployment and inflation entered double figures. Deutsche Bank said this month the fact that bankers won't let prices spiral and increased competition are reasons to consider the chance of stagflation is “fairly low.” Prices often lag behind a slowdown of growth they said.

The G-8 ministers also indicated they are less worried that tight credit poses an obstacle to growth than they were when they met in April noting conditions