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Prospects Weekly: Global inflation up 2% in Dec 09, US 10-year treasuries yields rising, possible fall in future ODA

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Global headline inflation rose to 2% in December 2009 (y/y), reflecting waning negative base effects from the collapse in food and fuel prices from a year earlier—during the acute phase of the crisis. The rise in headline inflation is most evident in low-income countries, where food and fuel represent a larger share of consumer outlays. However, core inflation has been more stable and continued to moderate across many countries. Long-term U.S. Treasury yields are up, possibly reflecting increased concern over the build-up of debt. Yields are lower in Europe, despite problems in some countries, which represent a relatively small share of the market. The severity of the current recession could lead to a decline in foreign aid, extrapolating from declines in disbursements from donor countries in the past during previous downturns, according to recent World Bank research, which suggests that aid could fall over several years. 2009 data for overseas development assistance is scheduled to be released Monday.
Headline inflation in low-income countries jumped in late-2009 (y/y), as the negative base effects from the collapse in food and fuel prices during the acute phase of the crisis (from a year prior) fade. Bangladesh, Cambodia, Guinea, Mauritania and Nepal reported particularly sharp increases. The median headline inflation rate for high-income countries also rose to 1.2% in February 2010 (y/y) from a trough of zero in July 2009, when some countries were reporting deflation. The increase in headline inflation mainly reflects the abatement of earlier food and fuel price-declines. Core inflation has been more stable, and moderating in many cases, due to high spare capacity and unemployment. In Japan, deflation remains a concern, with both headline and core rates at minus 1.1%.  
Yields on U.S. 10-year Treasuries are rising, even as bond yields in Europe and emerging markets remain subdued. The contrasting patterns of rising long-term yields in the U.S. and stable or declining yields in Europe and emerging markets has occurred despite increased concerns surrounding some European debt in a few of the Euro Zone countries, as they represent a small share of the European bond market. Inflation worries do not appear to be at play, as spreads on Treasury Inflation-Protected Securities (TIPS) remain low. Rising U.S. yields, which are now higher than in Europe, seem to reflect concerns about the long-term sustainability of U.S. government’s finances and perhaps expectations of a future depreciation of the U.S. dollar vis-a-vis other currencies. 
Overseas development assistance could contract in coming years. Extrapolating from trends in aid flows during previous recessions from 1977 through 2007—and given the extent of fiscal consolidation and lower potential output faced by donor countries—recent research (World Bank Policy Research Working Paper 5162) suggests ODA could fall by as much as 20% to 25% and that it could take about a decade for flows to trough. While this represents a possible worst-case scenario, aid flows are likely to be tighter than in the past. That prospect is all the more serious because, even though ODA disbursements have been rising in real terms in recent years, they have not kept pace with ODA commitments. 2009 data is due to be released Monday. 

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