Leading Economies Push Inflation

Major economies are operating at almost full capacity.

Leading world economies are working at almost full capacity and driving inflationary pressures but a general rise in interest rates could slam the brakes on, the head of the Organization for Economic Cooperation and Development (OECD) warned on Oct. 24.

Angel Gurria, the new secretary general said that apart from Japan, where inflation was low, "there is perhaps a slightly bigger problem of a fear of inflation because industry and the services sector are much closer to full capacity."

Any sharp change in the price of oil, followed possibly by an international crisis, would soon have an effect on price levels remarked Gurria.

Gurria said that a "new generation" of investment was needed to create new production capacity and therefore reduce inflationary pressures.

Interest rates in Japan, where the key rate had been zero for a long time, should not be increased quickly because it threatened to weigh heavily on the national debt he added. However, a general increase in interest rates would slow world growth or even bring it to a halt.

OECD saw a particular problem in an imbalance of savings, because the U.S. was a net spender and Asian countries were accumulating dollars. This led to a situation in which the U.S. said that interest rates had to rise to support the dollar, and then European and Japanese central banks did likewise. The result was a build up of pressure until "one day anything can happen," Gurria said, adding that so far the problem was being worked out through a slowing of growth.

Copyright Agence France-Presse, 2006

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