Wednesday, 25 June 2008

Inflation, What's That?

While having a dinner with some friends, one asked what was inflation?

Some say a picture is worth 1000 words. So here is a very rare photo of "inflation". This beast appear now and then every decade thus making it difficult to capture.

So here it is :

Inflation showing its "ugly head"

Inflation is accelerating in Finland and is threatening the economical stability of the country.

Mr Liikanen, the governor of Bank Of Finland, is clearly distressed, and gives a clear warning on a possible cost-pay spiraling out of control...

"In Finland, too, inflation has picked up substantially. This has been accompanied by a simultaneous quickening in the pace of pay rises and consumer expectations of higher inflation. 'The recent trend is very worrying. The correction of weakened cost-competitiveness is a difficult process in the context of economic and monetary union. It is therefore vital to cut the cost-pay spiral before it gets out of hand,' Governor Liikanen stressed at the press conference."

...If this happen then the game is over. The consequences would be irreversible and the economy will go into a prolonged slump as companies will shift some of the production away thus shooting up unemployment.

To my opinion, in quite few sectors there are pressures on salaries. I don't see any sharp rise in wages and I see the current inflation as a temporary one. An inflation that reflect an overheated economy, propulsed by bad lending practices (no down payment , weak collateral usually based on housing or stocks that is vulnerable, variable rate mortgages (98% of the total housing loan) ), overoptimism by household and companies on the situation of the Economy of Finland as whole.

So no need to talk about a Hard landing or soft landing, as we will still see a sharp slowdown next year. At the end the cards are in the hand of the U.S. and Emerging market. Should they slowdown more than anticipated or fall into a recession , then harder export oriented economies will be hit : The consumption will falter as heavy debt will put a break on internal comsumption, with export slowing down sharply it will provide a double blow.


worried said...

Finland is now a cork in a storm.

Emerging markets to hold up?

Mark Faber on inflation

Mau said...

India has been overheating so did the stock market.

Now the state mandate is to keep social cohesion by not letting inflation running out of control.

To my opinion, they did too little and are too late.

Salary wage have been spiraling out of control while the poor didn't see any change.

I suppose greed and corruption was flying high....