G8 to tackle inflation, but concrete action elusive

By Yoko Nishikawa

TOKYO (Reuters) - G8 leaders aim to present a united front against global inflation, driven by soaring oil and food prices, at a summit in Japan next week, but solving the problem requires more than just a strong message from rich nations.

As record high oil prices threaten the global economy and food riots undermine political stability in some countries, the Group of Eight (G8) will try to draw up measures to balance the supply and demand of oil, officials from member countries said. It will also aim for closer cooperation with oil producers.

When leaders from the G8 -- the United States, Britain, Canada, France, Germany, Italy, Japan and Russia -- gather at the July 7-9 summit in Hokkaido, northern Japan, they will discuss concerns that a weaker dollar is a factor behind high oil prices.

But with finance ministers and central bankers absent, they will probably make little headway. A German government source said while inflation was on the agenda, the G8 chiefs would not make interest rate recommendations to central banks.

"It is being questioned what kind of a message we will be able to send on rising oil prices," said Japan's point-man in pre-summit negotiations, Deputy Foreign Minister Masaharu Kohno.

He added that "there may not be a revolutionary panacea" for solving the problem of surging oil prices, which hit a record high of $145.85 on Thursday.

The German source agreed, saying G8 leaders were not in a position to reverse the trend of high prices. But the source believes a clear statement would help.

Analysts said a show of concern by the G8 would not be enough to ease global inflation, which took the centre stage just as the world economy was starting to recover from the credit crisis.

"The summit faces unprecedented challenges amid signs of stagflation, which had not been seen in 30 years," said Kyohei Morita, chief economist at Barclays Capital Japan.

"But there is a mismatch between the themes of the summit and who is participating, making it hard to actually implement any concrete and effective steps," he said. He noted that OPEC oil producers and Southeast Asian counterparts, whose trade restrictions helped push up commodity prices, would not be joining the G8 summit.

WHAT CAN G8 DO?

Rising oil and food prices not only fuel inflation but also hamper global growth by hurting businesses and consumption, posing a serious challenge to policymakers who cannot control the increasingly globalize, free-market economy.

"There is a limit to what governments can do now," a Japanese government source told Reuters on condition of anonymity.

"It is important to reach a global consensus on what's happening in the global economy, but the summit cannot always trumpet action plans."

Tatsuo Kageyama, analyst at Kanetsu Asset Management, said oil prices would stay high partly due to speculative money flowing into the oil market and the perception that demand will remain strong in the long run while supplies are tight.