Trichet warns of inflation:Its time for a discussion of the inflationary process

The head of the European Central Bank , Jean Claude Trichet is once again sounding hawkish about the risk of inflation, the need for ''fiscal discipline" and the likelihood of the Bank raising interest rates in the near future.

The problem with this sort of rhetoric is that it is based on a misconception of the inflationary process. Inflation like unemployment is actually quite a complex phenomenon. It is not simply and everywhere the result of an excessive growth in the money supply. This is particularly true during the recovery phase of what has turned out to be the worst slump and financial panic since the great depression.

 The global and European economies are subject to cartel driven price shocks , speculative pressures that emerge from the buying and selling of derivatives in the commodities futures markets as well as the pressures that emanate from the rapidly growing economies of China , India and Brazil. The European economy like other leading capitalist economies is a diverse , sectorially variegated and complex input output economy.

 Some sectors are strongly and immediately affected by cartel price pressures and because of their oligopolistic nature and the presence of strong trade unions they are susceptible to cost push price pressures.

 Others are much more competitive in nature and can operate very close to their capacity operating rates without experiencing inflationary price rise. So the picture is not black and white. Furthermore, the rate of operating capacity in most of the European economy is nowhere near the full capacity utilization rate.

Unemployment remains very high in many parts of the economy and capacity utilization still rather low.

Washing a wave of money supply across such a structure does not necessarily lead to true inflation that is properly managed by increases in interest rates. In addition, since the source of a substantial portion of whatever inflation is appearing is cartel driven, it is rather damaging and loaded with negative externalities to attack the problem by deliberately slowing the overall economy with increases in the rate of interest that will be premature.

The participants at Davos need to rethink their assessment of the inflation risks in recovery and come down on the side of the millions who will benefit from a more prolonged and robust recovery before central banks become obsessed over inflation as opposed to unemployment.