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Business FX Blog

Adam Solomon is a specialist in business foreign exchange issues at foreign exchange brokers TORfx.

The idea of this column is to assist businesses in saving money on making or receiving payments in foreign currency. It is developed with all companies in mind from public companies with large and complex operations, to smaller companies and individuals.

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Home Global Economic News Global Three reasons to expect higher global inflation

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Three reasons to expect higher global inflation PDF Print E-mail
Written by Gary Howes   
Friday, 03 July 2009 13:39
Global Economic News: Economists at Morgan Stanley (NYSE:MS) in London have warned that in the coming decade inflation will significantly exceed the levels seen over the past decade.

The warning comes as inflation in the UK is proving sticker on the downside than expected by many economists and market analysts.  

The latest inflation figures for the UK show that the headline Consumer Price Index fell to 2.2 percent, but economists had expected prices to fall below the Bank of England's target of 2 percent to 1.9 percent.

However in the Euro zone inflationary pressures fell to new record low in May, a forward-looking indicator showed on Thursday, suggesting the official measure of inflation will likely fall further below zero in coming months.

Three reasons to expect higher inflation:

The Morgan Stanley prediction on inflation is based on three pillars:

1) The economists think that most observers vastly overestimate both the size of the ‘output gap' and the importance of this gap for determining inflation. Earlier research has shown that global factors, rather than national output gaps, are the main determinant of inflation these days.

2) The ‘secular' global forces that helped to push inflation lower or keep it low over the past couple of decades - productivity, deregulation and globalisation - will likely be less prevalent in the years ahead.

3) Quantitative easing (QE) is in full swing globally, and Morgan Stanley think that central banks will be slow to exit from it collectively, especially if economic growth remains subdued. The longer super-easy global monetary conditions remain in place, the more likely it becomes that inflation expectations and actual inflation will start to rise significantly.