C. Inflation Factor Essay Example for Free

C. Inflation Factor Essay Global growth remains noticeably above the historical trend, while inflation and long-run interest rates are unusually low. Global headline inflation has picked up in response to higher oil prices, but core inflation has been little affected and inflationary expectations remain well grounded. This has raised questions as to whether low inflation reflects deflationary. pressures from other sources, notably globalization, or whether there is a danger that the inflationary impact has simply been postponed. The global inflation rate has declined from an annual average of close to 15 per cent in 1980-84 to 3. 8 per cent in 2005. The average inflation rate in the industrial economies fell from almost 9. 5 per cent between 1975 and 1979, and nearly 9 per cent in the early 1980s, to 2. 3 per cent in 2005 and is projected to decline further. In developing countries, the decline has been even steeper and more rapid. In the early 1990s, the average inflation rate in developing countries was around 80 per cent; that had declined to 5. 4 per cent by 2005. The IMF forecasts currently project a further drop, to below 5 percent by 2007 (Kruegar). Over the past two years, inflation in advanced and many emerging market economies has remained remarkably subdued despite a significant rise in commodity prices, strong growth, and a broadly accommodating monetary policy stance in the major currency areas. Some analysts have argued that low and stable inflation reflects more intense global competition, which prevents firms from raising prices and puts downward pressures on wages in many sectors. If so, and given that lower-cost producers in emerging markets and developing countries will continue to integrate into the global trading system, these forces are likely to ensure low inflation in the foreseeable future (World Economic Outlook, â€Å"inflation† 97). This dramatic fall in inflation rates in the recent years owes a great deal to significantly improved macroeconomic management. Monetary policy has become much more effective, helped by the spread of central bank independence and, in many cases, by inflation targeting. And as inflation has declined, and more countries have adopted fiscally prudent policies, growth has become more rapid and, equally important, more durable. In addition, the rapidly expanding role of Asia and, to a lesser extent, the countries of the former Soviet bloc as low-cost manufacturing centers have served to dampen price inflation in high-income countries, where many of these products are consumed (World Bank).