Morici: Inflation Moves to Center Stage, Highlights Fed and G20 Impotence

Today, the Labor Department reported consumer prices were up 0.5percent in March, driven by 3.5 and 0.8 percent jumps in energy and food prices.

This is the fourth straight month of large gains in consumer prices. While food and energy prices may be volatile, international conditions indicate commodity prices will continue surging, and the Fed’s emphasis on core inflation is absolutely misplaced.

With inflation running at 6 percent a year, it will be tough for the Federal Reserve to deny inflation and continue quantitative easing and low interest rates generally. Similarly, with unemployment likely to remain above 8 percent for the balance of the year, the Fed will find it tough to raise interest rates too much.

The U.S. economy is headed for stagflation thanks to failed banking and international economic policies that lie largely beyond the Fed’s control.

At the heart of the Great Recession and now stagflation are two dysfunctions—problems in U.S. banking, and China’s currency policy and Germany’s privileged position in the EU. For different reasons, but with the same effect, China and Germany enjoy undervalued currencies and protected domestic markets, and are creating imbalances in demand for goods, services and workers globally.

Recent banking reforms have not changed how Wall Street does business—the emphasis is still on trading instead of making sound loans. Whereas before the recession banks made reckless loans—based on the shady practice of pushing loan-backed securities on unwitting investors—now they are starving small and medium-sized businesses for the credit needed to create jobs.

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Also, Beijing subsidizes imports of oil and other commodities with the dollars it obtains selling yuan to keep its value low. In the case of oil, it gives to refineries dollars it obtains selling yuan to offset the high price of imported oil. That pushes up oil and other commodity prices globally. Simply, China’s currency policy is a global inflation machine.

In combination, China’s currency policy starves its trading partners of demand for goods, services and workers with subsidized exports of consumer goods and pushes up inflation in those economies by elevating oil and other commodity prices. That makes China’s currency policy a global stagflation machine too.

This week the G20 Finance Ministers, representing the largest developed and developing countries, are meeting in Washington. And again China and Germany block progress. Instead, they prefer to lecture other countries about the genius of their policies, when those policies are nothing more than beggar thy neighbor protectionism, exporting unemployment and fiscal crisis to their trading partners.

The Obama Administration needs to give up on failed multilateral groups and lead concerted action with a few other major nations in responding directly, or as necessarily, act unilaterally to respond to Chinese and German protectionism. If not, Americans can look forward to high unemployment, damaging inflation, falling real incomes, and continuing economic woes.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.