Can the U.S. Sidestep Growing Global Inflation?

Consumer price inflation
Consumer price inflation

Inflation in Britain hits 4%, double the official government target. China reports prices accelerating at 4.9% in January. And Spain says its inflation measure shot up 3% last month. With prices on the march around the globe, can America hope to remain resistant?

A significant part of the inflation scourge now sweeping countries as far away as Brazil, India and the U.K. is a combination of food prices shooting up after droughts in Russia and China and severe flooding in Australia. That was compounded by energy costs moving substantially higher as crude oil topped $100 a barrel last month.

"As far as global food and energy prices are concerned, they will hit us just as much as anyone else," says Polina Vlasenko, a research analyst at the American Institute for Economic Research in Great Barrington, Mass. "But there are also idiosyncratic things in places like China and Russia that won't spill over into U.S. prices."

European Services Inflation Is Spreadable

Vlasenko says some inflation may be imported from cheap-labor markets like India and China, but she's much more concerned about inflation in places like Britain and continental Europe, where spiraling prices are so much rarer.

"Those economies are much more like ours than the Chinese economy," Vlasenko says. "We're not shipping textiles back and forth to Europe, but we are trading in other things including services, and that linkage would be much more direct."

While consumers do snap up Chinese goods like shoes and T-shirts at Walmart, Americans don't spend that much of their collective income on manufactured goods. Rather, they spend a much bigger fraction on intangible services, things like insurance and investments. The same is true for Europe.

"If whatever is causing Europe's inflation is spilling into prices for services, then the same is likely to happen for us," Vlasenko says.

British Peculiarities

Stephen Stanley, chief economist for Pierpont Securities in Westport, Conn., says the global demand for commodities is affecting prices everywhere. "It's certainly not the case that the U.K. is the only one dealing with inflation. Certainly, the eurozone has had some pretty high headline inflation readings." The European Central Bank has publicly signaled its concern about the inflation problem.

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He added that Britain does have some peculiarities, namely the fact the pound remains independent of the euro and has declined sharply in recent months, which causes the price of imports to Britain from continental Europe to rise. In addition, the government of Prime Minister David Cameron has imposed a series of sales tax increases that has shown up in inflation data as higher prices.

While Tuesday's inflation report from Beijing was less than some economists had expected, most analysts still believe the Chinese government will have to continue increasing interest rates to keep prices in check. It has already raised rates three times in the last five months.

Stanley says inflation in the U.S. is also likely headed higher from last year's very low levels, with the consumer price index up 0.5 percentage points last month alone.

Why Exclude Food and Energy?

"Going forward, I think inflation is going to accelerate. But I don't think we are looking at the sort of numbers that the U.K. recorded anytime soon," Stanley says.

He noted that the Federal Reserve, which sets interest rate policy based on its readings of unemployment and inflation, prefers to track prices according to "core CPI," which doesn't include food or energy.

But as Vlasenko observes: "If we're trying to ascertain if it's getting more expensive to buy the necessities of life, we should include food and energy."

Perhaps if those numbers were considered, America might be more alarmed about price rises in the future. Such concerns have prompted investors to speculate heavily in inflation hedges, such as gold and silver bullion in recent months. After all, if inflation really starts to spiral upward, it could also kill the recent stock market boom.