The World Food Program is one of the many humanitarian groups trying to get aid into Gaza
mena9 hours ago
With fuel protests breaking out across Europe and U.S. consumer confidence at levels not seen since since the stagflation days of the 1970s, inflation has clearly become a hot political issue. It is high on the agenda at the July 7-9 meeting in Hokkaido of the Group of Eight -- Britain, Canada, France, Germany, Italy, Japan, the United States and Russia.
The trouble is, there is little that central banks in Europe, Japan or the United States can do to tame the price pressures unless demand cools from fast-growing countries such as China and India, where energy costs are subsidized.
"No one can be interested in seeing the industrial nations forced to their knees" because of high oil prices, said Bernd Pfaffenbach, Germany's sherpa to the G8 summit.
The European Central Bank nudged up interest rates on Thursday, just days after a report showed that euro zone inflation hit 4 percent, well above the central bank's target of just under 2 percent.
But ECB President Jean-Claude Trichet signaled that it may be a while before the next rate move, and the U.S. Federal Reserve is loathe to raise borrowing costs while the economy remains in danger of tipping into recession.
That leaves world leaders looking for other ways to calm inflation. One way is to try to curb demand from emerging economies -- a delicate proposition considering it is the strength in these countries that is keeping the global economy growing at a healthy clip.
"The developed countries should be banging the drum loudly to get these countries off of their subsidized domestic energy," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago. "In essence, the developed countries are paying for that subsidy."
Curbing demand
China has responded to such sentiment by pointing a finger at the slumping U.S. dollar. Because oil is priced in dollars, the weak currency has been blamed for driving up energy prices. Chinese Premier Wen Jiabao urged the United States last week to stabilize the dollar, state television reported.
While China raised its domestic gasoline and diesel prices last month, costs remain below the world average.
Peter Morici, a professor at the University of Maryland School of Business and longtime critic of U.S. policy toward China, estimated that China's gasoline price is about $3.10 per gallon, less than half of what many consumers pay in Europe and one-quarter less than the U.S. national average of $4.10 a gallon.
He said China's huge export machine, which brings in U.S. dollars by the hundreds of billions, gives it plenty of leeway to keep paying for fuel subsidies.
"China buys enough dollars through its currency intervention to subsidize oil imports at a rate of $100 a barrel and still only use two-thirds of the dollars it buys," Morici said.
Tougher talk?
A senior Japanese official told reporters on Thursday that the G8 would discuss the role the weak dollar has played in pushing up prices for commodities, particularly oil. The big question is whether leaders will choose this forum to try to strengthen the U.S. currency.
"We expect beefed-up rhetoric, but no actual action or accord yet," said Arnab Das, global head of foreign exchange research at Dresdner Kleinwort in London.
U.S. President George W. Bush said on Sunday the American economy was not growing as quickly as he would like and that his administration supported a strong dollar policy.
Speaking at a news conference after meeting Japanese Prime Minister Yasuo Fukuda ahead of the G8 leaders summit, Bush said: "In terms of the dollar, the United States believes in a strong dollar policy and believes the strength of our economy will be reflected in the dollar," when asked what world leaders could do to improve the economy and intervene to boost the dollar.
G8 finance ministers shied away from stepping up the currency rhetoric when they met in Japan last month, but the timing may be better now.
The dollar rallied against the euro on Thursday, ahead of a three-day Independence Day holiday weekend in the United States, as investors concluded that the ECB was finished raising interest rates for the time being.
A sharply worded statement from the G8 this week might give the greenback another shove higher.
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