Well the G7 meeting has come and gone, but I’m not sure how much the world is going to notice the fact. If I had been a fly, perhaps I would now be glad I hadn’t wasted my efforts. Basically there is a ‘shift’ from focusing on the oil issue to the inflation one, but given that in the two countries which are now driving global growth – the US and China – inflation is coming slowly but surely under control, I would have thought that this was to start to fall behind the curve instead of getting out in front of it. Put another way, since I am sure the Fed will push on through with the measured pace till the last drop of inflation oil is squeezed out of the US economy, I sure as hell don’t imagine that inflation is going to be tomorrow’s issue, and I guess this is the bit that the markets are really interested in.

“Finance ministers and central bank governors from the world’s leading economies have warned of increasing inflationary pressures, adding to concerns over rising protectionist sentiment and global trade imbalances….The warning on inflation came as the US Federal Reserve continues to tighten monetary policy and follows the European Central Bank’s quarter point rate increase last week – the first in five years. The Bank of Japan has also started to prepare the ground for an eventual curtailing of its exceptionally loose monetary policy.”

I think, btw, that the G7 are right to stress the importance of higher oil prices in the longer term as a constraint on the consumer, but this is ultimately a terms of trade effect – final consumption in the OECD world is squeezed as petro dollars mount up elsewhere – rather than an inflationary one as long as the monetary authorities keep the lid on ‘second round effects’. If you wanted to be really cynical you could say that the US government deficit was working as a giant paddle to keep the flow of funds moving, converting all those accumulated petro dollars into final consumption, but somehow I doubt Brad Setser would want to see things like this.