Current global conditions: Inflation and unemployment

In the aftermath of the global financial crisis, the main challenge facing the U.S. and its trading partners was a return to growth. After these economies improved in 2010, the outlook now for the main trading partners of the U.S. is for slower growth in 2011, accompanied by unemployment worries and new inflationary pressures from oil and commodities.

In the aftermath of the global financial crisis, the main challenge facing the U.S. and its trading partners was a return to growth. After these economies improved in 2010, the outlook now for the main trading partners of the U.S. is for slower growth in 2011, accompanied by unemployment worries and new inflationary pressures from oil and commodities.

For example, real Gross Domestic Product for Germany was up by 3.2 percent last year, but according to International Monetary Fund analysts, GDP in Germany will drop back to 2.2 percent gains in 2011. Japanese GDP, up by 3.9 percent in 2010, was originally expected to increase by one-half this pace, 1.6 percent in 2011. Now, with the economy affected by the earthquake, growth may be even lower.

Inflation highest in China and the UK

While economic growth is an issue for every U.S. trading partner, inflation and unemployment vary in their impact. In February, U.S. consumer price inflation was 2.1 percent over the past 12 months. Food and energy prices have accelerated, but the latest (March 15) Federal Open Market Committee release "expects these effects to be transitory."

The Federal Reserve characterizes U.S. inflation expectations as steady. Among the main U.S. trading partners, inflation does not seem to be an immediate problem for Canada, Japan and most of the Euro Area (see table). Inflation is more problematic for China and the UK.

Although Mexico's annualized inflation of 3.6 percent seems high, the January report was the lowest rate in the last 14 months. Surprisingly, Mexico's inflation has been decreasing despite rising commodity prices because considerable capital inflow has led the peso to strengthen. Annual inflation was realized as 2.4 in the Euro Area (February) but it was 4.0 percent in the UK (January).

Both figures largely reflect high oil and non-oil commodity prices. In China, the fastest growing large economy in the world, the annual inflation rate was 4.9 percent in January. Inflation in the world's second biggest economy has exceeded the central bank's target of 4 percent for four consecutive months, again mainly due to high food and commodity prices.

Unemployment a problem in Euro Area

According to the U.S. Department of Labor, unemployment was 8.9 percent in February, down from 9.0 percent in January. A year ago, in February 2010 unemployment was 9.7 percent. U. S. unemployment is expected to decline gradually in 2011. Unemployment among U.S. trading partners is greatest in the Euro Area, where the overall rate was 9.9 percent in January.

In the UK and Canada unemployment is approaching 8 percent. Moreover, the number of people claiming unemployment benefits in the UK is on the rise in 2011. While Japan's unemployment rate of 4.9 percent does not seem high compared to other advanced economies, it is well above the historical average.

From 1953-2010 the unemployment rate in Japan averaged 2.6 percent. Similarly, while the unemployment rate seems not very high in China, the resulting large absolute number of unemployed workers still is a major concern for China. Mexico's relatively low unemployment rate is actually decreasing more than expected, due to the recovery in the domestic economy as well as in the U.S. economy.