Global Economy on a Slow Summer Burn

Financial markets lately have been predicting a peak for China's inflation rate. This is a psychological trick designed to embolden investors, in hopes more will focus on a (probably manufactured) trend that disregards real price levels and the big picture.

Actually, China is just beginning a major struggle with inflation. The government is raising interest rates but quite slowly – so slowly, in fact, that instability will mark the nation's inflation rate trend through 2012.

There's also a big risk that certain developments designed to cool overall inflation will give Chinese policymakers an excuse to switch to loose from the current tight monetary policy. These developments may include reduced import duties, highway toll rollbacks and declining oil prices. But any easing is sure to be followed by another inflation spike.

China's price struggle is just one of many signs of this summer's increasingly apparent global economic slowdown. The signs are obvious in the developed world. High unemployment and falling house prices are battering the United States, a sovereign debt crisis is spreading in the euro zone, and Japan is trying to recover from the earthquake-tsunami disaster.

It's clearer than ever that the economic "recovery" reported in the wake of the 2008 financial crisis was built on an unstable foundation. Governments used economic stimulus programs to hide from the headwinds tied to structural problems. This year's summer slowdown reflects the fact that stimulus benefits were short-lived, and structural problems remain unresolved.

Thus, the slowdown should be viewed as a lasting phenomenon rather than a temporary soft patch.

Dominant Gloom

There isn't much good news for the global economy right now. True, oil prices have fallen for the Europeans and Americans, with West Texas Intermediate crude recently trading at US$ 20 less per barrel than Brent crude. WTI barrels usually trade higher, but the United States and its allies recently released 60 million barrels from strategic reserves to hold down WTI, influencing the price spread. Weaker demand is also keeping prices in check in the West.