I kept wondering why inflation is rising now, but this article offers one clue: inflation was kept artificially low by cheap imports. Now these imports are no longer getting cheaper, so the other goods/services which have been rising all along are no longer crowded out by falling import prices.
The liquidity glut brought this on, and I wonder why Bernanke doesn’t just reduce the money supply. Wouldn’t that solve the inflation problem for good?
QUOTE
The problem diagnosed by the BIS was that globalisation helped bring inflation down to extremely low levels after the 1980s but ever cheaper imports masked other problems in advanced economies.
The BIS worries that central bankers worldwide kept interest rates too low for too long, allowing asset prices to surge and global trade imbalances to reach unprecedented levels. These potential mistakes were compounded by central banks in Asia, particularly China, artificially preventing exchange rates from appreciating.
The immediate consequence for advanced economies is rising inflationary pressure now import prices are no longer falling. But the nagging longer term threat is the unwinding of the huge trade imbalances embodied in the US current account deficit and huge surpluses in China, Japan, Germany and oil exporters.
The report argued that “inflationary pressures might re-emerge with a vengeance and/or that the unwinding of the financial imbalances could undermine economic activity and contribute to unwelcome disinflation”.
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