Inflation biggest world threat since 1970s - S. Korea president

The world economy faces its gravest threat since the oil shock of the 1970s due to soaring prices, South Korea's president said yesterday, underlining concern among global policy-makers about inflation.

Finance ministers from the world's richest countries meeting in Japan at the weekend warned that soaring commodities prices could damage economic growth, but they didn't come up with any plans to calm financial markets or quell public protests over the rising cost of living.

"It's no overstatement to say that the world is faced with the gravest crisis since the oil shock of the 1970s, with oil, food and raw materials prices skyrocketing," South Korean President Lee Myung-bak told an Asia-Europe finance ministers' meeting in his country.

Mr Lee has seen his popularity plummet since he stormed to a landslide victory in a presidential election in December. A deal to import US beef has been a lightning rod for a range of grievances, including high fuel costs and plans to privatise state companies.

Mr Lee's remarks came as benchmark US corn prices jumped more than three per cent to hit a record high, although oil prices eased as Saudi Arabia, the world's biggest producer, prepared to raise its production.

Inflation dominated the meeting of Asian and European finance ministers.

French Economy Minister Christine Lagarde said the world needs more clarity on the market mechanisms behind surging oil prices and France has asked the International Monetary Fund and the International Energy Agency to investigate the fuctioning of the market.

IMF Deputy Managing Director Takatoshi Kato said the message to policy-makers was to ensure minimal second-round effects of elevated food and fuel prices. Second-round effects refer to price rises spreading through an economy, such as through demands by workers for higher wages.

He said countries such as Vietnam and Indonesia were behind the curve on policy imperatives to tackle inflation.

"Each country needs to take action best suited to its own circumstances," he said.

Still, officials from the 40 Asian and European countries represented at the meeting had few definitive solutions to tackle soaring prices.

Recent comments from policy makers at the US Federal Reserve and the European Central Bank have raised market expectations that the world's central banks could start to push up interest rates to try to calm price pressures.

Last week, two-year US Treasury yields, the most sensitive to interest rate expectations, had their biggest rise in 26 years, going up by 65 basis points to more than three per cent.

Adopting a hawkish tone, ECB Vice President Lucas Papademos said inflation in the euro area would remain elevated for some time.

The eurozone central bank has flagged the possibility of raising interest rates for the first time since 1999, perhaps in July.

"The outlook for price stability has deteriorated and the risks to inflation remain on the upside," Mr Papademos said at the finance ministers' gathering in South Korea.

"It is likely that annual inflation will remain above three per cent for a protracted period of time before declining gradually next year."

Hawkishness seemed to be pervading Asia. Philippine Finance Secretary Margarito Teves said rates were set to rise in his country. Thai central bank Governor Tarisa Watanagase sent similar signals, warning that inflation there could hit double-digits in some months ahead while trying to assure that rate rises would not hurt economic growth.

Although benchmark US crude prices have backed off a record high of more than $139 a barrel struck earlier this month, they are still up 40 per cent so far this year and have almost tripled since the beginning of last year.

US corn futures rose more than three per cent yesterday in Asian trade after powerful storms hit crops in the US Midwest, raising concern about a supply crunch for a grain used for both human and animal consumption and for making biofuel.

July corn rose to more than €4.8 a bushel to stand 90 per cent higher than a year earlier.

Long-term weakness in the US dollar has been blamed by some, including Ms Lagarde, for the rise in commodity prices. They argue speculators are putting their money into commodities to hedge against the dollar's decline.

Others say fast-growing emerging economies such as China, India and Brazil have ramped up global demand for fast-depleting resources, forcing prices higher.