Dilemmas for Central Banks

Central banks need to balance between excess inflation and high unemployment. Three years has passed since the global credit crisis. In place of the credit bubble, there is currently a surge in global food and commodity prices.

In 2008, there was an inflation shock that ultimately was cured by the financial and economic crisis in advanced economies. With inflation coming back now, central banks might have to raise interest rates. However, central banks in advanced economies believe that the "output gap" resulting from high unemployment in these economies would ultimately put downward pressure on inflation.

History also tells us that since the second World War, big falls in US inflation have all occurred during or just after recessions.

Summary: 5 Jan 2010

• Eurozone inflation at 2.2%; price pressures are expected to remain subdued with fiscal austerity measures; ECB would not raise rates with banking systems in debt crisis
  
• Oil price nears $100; oil prices at such high levels threaten economies' recovery; OPEC is faced with pressure to increase their oil output; ratio of oil import bills to GDP is close to the levels seen during the financial crisis