(New York-WSJ) For decades Latin America has been plagued by currency devaluations, inflation and lackluster growth. But just as some key countries have gotten serious about price stability and begun to reap the benefits through higher growth, the region is facing a new economic menace: the Federal Reserve.
The Fed is exporting inflation to the rest of the world as dollar-denominated commodity prices soar. The Latin American countries that keyed their currencies to an unofficial dollar standard are now finding that the standard is collapsing.
It hasn't been easy, but in recent years most Latin American central banks, excluding Venezuela and Argentina, have diligently battled inflation despite the higher-than-ideal interest rates required. To further tighten credit, Chile on Friday hiked its bank rate by 50 basis points to 7.25%, and Mexico is expected to take its rate to 8% before year's end. Brazil has raised its equivalent rate by 100 basis points in recent months to 12.25%. Peru and Colombia have also adopted hawkish stances.
These unpopular measures, however, have little effect on imported inflation. With oil and commodities priced in dollars and the dollar sinking in value, there is nowhere for prices of these globally traded goods to go but up, and no way for central bankers to avoid the effects on prices at home.
Two weeks ago, the world learned that the Fed is unlikely to take responsibility for dollar inflation any time soon. Worse, it now wants to blame the victims -- the emerging economies -- for the problem of rising food and energy prices. The finger pointing occurred on June 26 in Frankfurt, Germany. The finger pointer was the vice chairman of the Fed's Board of Governors, Don Kohn.
In a speech to the International Research Forum on Monetary Policy, Mr. Kohn laid out how he sees the problem: "It is clear," he said, "that the sharp increase in many commodity prices has given rise to highly coincident increases in inflation rates around the world."
Coincidental? Well, maybe not. He continued: "In industrialized economies, such as the United States, rising inflation has chiefly reflected the surge in energy prices, whereas in developing countries, for which food takes up more of household budgets, rising food costs have been a more important culprit." In other words, Americans driving SUVs and the masses in the rest of the world trying to feed themselves are the cause of inflation. The Fed's feckless dollar husbandry is not to be blamed.
Why inflation persists even when the global economy is no longer booming is apparently a mystery over at the Fed. Or as a puzzled Mr. Kohn put it: "The reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear."
Nonetheless, the vice chairman put forth a hypothesis. "The upward trend in prices of food and energy over the past several years importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities." Translation: Developing countries are consuming too much and there is not enough to go around. Mr. Kohn did not mention another American blunder on top of the dollar: the massive corn-ethanol program, which has put additional pressure on grain supplies.
"For the moment," Mr. Kohn continued, "higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer-term inflation expectations." In other words, he doesn't think we have a problem. On the other hand, just to be on the safe side, he's happy to let someone else solve it. "In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability."
I thought that the "Phillips Curve" -- which alleges that inflation is a byproduct of growth -- had been discredited 30 years ago. Apparently not at the Fed. But it sure has been in Brazil, where expanding investment and growth have been byproducts of Brazil's success in currency stabilization.
It is not encouraging to learn that a Fed official thinks global inflation is caused by growth and has nothing to do with the weak dollar. The world knows better. It knows that the Fed is responding once more to a crisis in the American financial sector that it had a great deal to do with creating through its overly accommodative policies.
The world also knows that the Fed has given pressures from Wall Street and Congress priority over its responsibilities in managing the world's most important currency. If central bankers in Latin America resent the shifting of blame by a top Fed official, they are fully justified.
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