Bernanke and Trichet: The anti-inflation double act

PARIS (Reuters) - Fed chief Ben Bernanke and ECB president Jean Claude-Trichet may not look like identical twins, but as they line up to stop a surge in global inflation becoming more permanent, it's almost impossible to tell them apart.

Financial markets are convinced that the heads of the U.S. and euro zone central banks are both ready to raise interest rates during an economic slowdown if that is what it takes to prevent chronic 1970s-style inflation.

Hit by surging fuel and food prices, however, households and fuel-reliant businesses may not respond as readily as investors to the tough talk the two central bankers adopted in the space of just a few days.

Oil prices have risen roughly 30 percent since the start of this year and five-fold in five years, while the price of many food commodities doubled in the two years to end-2007, lifting headline inflation worldwide.

The knock-on impact on retail fuels prices have sparked wave after wave of protest, strikes and blockades in Asia and Europe, primarily by truckers and fuel-dependent professions but also students in place such as Nepal and Indonesia.

The situation is alarming enough to top the agenda for talks at the end of this week in Japan among finance ministers of the G8 economic powers: the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.

The verbal offensive from Bernanke and Trichet began in earnest last week, prompted by fears that the surge in fuel and food prices was not fading as fast as first hoped.

Bernanke went first, warning that dollar weakness could worsen inflation, already a cause for concern. He followed with an equally noteworthy assurance that the flagging U.S. economy had looked less dire in the past month or so.

Trichet's announcement last Thursday that the ECB could hike euro zone interest rates in July was as much if not more of a bombshell as far as markets were concerned, especially from a man who says the ECB does not pre-announce its decisions.

The net result was a shift in debt markets, in the space of a few days, that shows investors are positioning for rate rises near-term.

Accompanying that movement was a relative decline in yields on longer-dated government debt, suggesting that markets are if anything less worried now than before about inflation prospects further down the road.

"Both (central) banks are now striking a much more hawkish note and...they are being effective in persuading markets that rates will go up and inflation will stay under control," says Marco Annunziata, chief economist at investment bank UniCredit.

The overall rate of euro zone consumer inflation is at an all-time high of 3.6 percent and stands at roughly the same level in the United States. China's inflation rate is about twice as high.

Annunziata says Trichet is nonetheless playing with fire by going as far as flagging a rise in the ECB's benchmark interest rate in an economy which, while not as feeble as the U.S. one, shows signs of slowing markedly at the moment.

Nobody knows to what extent Trichet and Bernanke choreographed their announcements last week.

Eric Chaney, chief economist for the European region at U.S. investment bank Morgani Stanley, believes it may well have been neatly plotted, with Bernanke going first with remarks that gave the dollar a lift.

While Trichet's follow-up looked at odds to the extent that the prospect of an ECB rate rise is essentially dollar-negative, it is arguable that the net effect limited the collateral damage from a move primarily aimed at demonstrating that inflation was public enemy number one both sides of the Atlantic.

Annunziata at UniCredit believes coordination had little to do with it, even if the outcome served the ultimate objective of both central banks, not to mention the fact that Trichet faces intense pressure from the most hawkish on his ECB team.

Daniel Gros, economist director of the Centre for European Policy Studies in Brussels and president of San Paolo IMI Asset Management, argues that the short-term market response to Trichet and Bernanke is only part of the story of long-term rates.

High oil prices means large revenues for oil-producing countries which pump it back into U.S. assets such as U.S. government debt, keeping rates down.

In Osaka, the finance ministers can be expected to highlight concern over global inflation and the need to combat it, but may not much more.

As one European official put it ahead of the those talks, G8 declarations could be expected to stop well short of anything as specific as an endorsement of central bank rate rises.