By: Dr. Mike Campbell
The Organisation for Economic Cooperation and Development (OECD) is and association of 34 developed countries that seeks to improve prosperity through economic reform and trade liberalisation.
OECD has suggested that the global economy could fall into “stagflation” because of higher food and commodity prices, a down-turn in China and the continuing effects of the Japanese natural disaster in March. Stagflation is a term coined to refer to a period of stagnant (or flat) growth coupled with higher inflation. OECD identified the current political instability in the Middle East as a key factor which may send oil prices higher, precipitating economic slowdown. If the price of crude oil rises, it has a knock-on effect not only on fuel costs, but since much of the world’s electricity generation uses oil, energy prices would also rise. Of course, the vast array of products which are derived from crude oil would also become more costly. It points out that the finances of many states are still weak as they struggle to recover from the global financial crisis.
However, the organisation believes that if commodity prices do stabilise that the effects of the Japanese disaster and the higher prices would fade as the year continues, permitting the recovery to pick up towards the end of the year.
OECD has called on the Bank of England to raise interest rates later in the year as a means to tackle inflation. For a long time, it has been clear that the Monetary Policy Committee (MPC) of the Bank of England is divided on when rates should rise and the balance between encouraging growth and combating inflation, however the MPC is united on the fact that rates will have to rise at some stage.