anticipated US recession, if and when it arrives, will undoubtedly extract a price from economies in the Asia-Pacific (Aspac) region, and the US Federal Reserve's efforts at mitigating the slowdown are only going to add to the final bill. The source of that economic cost is inflation - both the part that's already realized because of sky-high commodity prices and the part that's expected from the current round of US monetary expansion. Actually, the elevated prices of minerals, metals and food may be less a result of explosive world demand, led by China and India (which is nowadays the standard explanation proffered by many economists), and have more to do with cheap money, as Professor Jeffrey Frankel of Harvard has recently argued. If Frankel's hypothesis is correct, monetary-policy options for the Asia-Pacific region are very limited. No matter what they do, the inflation genie won't go back into the bottle without a huge global deflationary shock, precisely the kind of US recession that the Fed is so intent on preventing. With crude oil often trading above $100 a barrel, and wheat futures almost two and a half times as expensive as a year earlier, fuel and food prices are a big worry for policy makers. Declining US interest rates and a weakening dollar are compounding the challenge. The situation is peculiarly tricky for central banks that don't set interest rates independently, opting instead to import the monetary conditions prevalent in the United States. All of these monetary authorities are now being forced to live with real - or inflation-adjusted - interest rates that are already negative and continuing to fall, stoking potentially dangerous speculative fervor in property markets and feeding into expectations of higher wages. Saudi Arabia, the United Arab Emirates and Bahrain, which peg their currencies to the US dollar, cut their benchmark rates by three-quarters of a percentage point this past week, following the reduction by the same amount in the Fed's target for interbank rates. The Hong Kong Monetary Authority - which also maintains the value of the local currency against the US dollar - had to make a similar change to its base rate. “With higher inflation and with our economy continuing to perform strongly, we would have liked to see positive rather than negative real interest rates,” Joseph Yam, the chief of the Hong Kong Monetary Authority, said last month. Inflation in the Chinese territory is at a nine-year high. But countries that have more flexible exchange rates - and, therefore, greater freedom in setting the price of local money - are not exactly on top of inflation, either. The Reserve Bank of India is under pressure to cut interest rates. But with inflation having accelerated to a nine-month high, and the fiscal taps wide open, the elbow room for monetary easing is simply not there. Or, take Australia, the world's biggest exporter of coal, iron ore and wool. Even with interest rates that are at their highest in 12 years, inflation in Australia is still at the fastest rate in 16 years. Buoyed by commodities, Australia's terms of trade, or the average price of its exports divided by the cost of its imports, have surged 41 percent in the past five years. Such good fortune, not seen since the boom of the 1950s that followed the Korean War, shows “a very large change in relative prices in the world economy.” __
