Inflation
Definition: "inflation is a rise in prices".
see also: inflation rates by country , rising inflation worries 2008 , High Oil Prices, Weak US dollar , commodities bubble in 2008 , microcredit and inflation
Most likely, the one very important reason for the increase in consumer prices can be closely associated with the extraordinary rises in commodity prices. According to The Economist Commodity-Price Index, food is the major source of the recent pressures. While the full index increased by 31%, food rose up to 65%
Table of Contents
Global inflation concerns
Global inflation has quietly climbed to historic levels, saddling policy-makers with tough choices that could end up squashing the euro and pushing up Asian currencies.
At a time when global growth is slowing and prices are rising, a strengthening currency can help protect consumers by boosting their buying power.
The conventional wisdom says countries with relatively weak currencies will have an easier time battling inflation in 2008, provided growth remains stable, since there is more room for them to rise. Countries with strong currencies, such as the euro, will likely have fewer anti-inflation tools at their disposal since higher interest rates will risk choking off growth by pushing the currency even higher and crimping exports
For the first time in a really long time, global prices are rising beyond the comfort level of most central bankers. Which means that the world should brace themselves for higher interest rates down the road as central bankers get ready to fight against higher inflation. Also, in response to higher food, energy and health costs, we are seeing governments around the world trying to combat inflation with price controls (a big mistake). By capping prices (good intention), they are distorting the markets, and are leading to shortages and under investment (bad consequences). While inflation has not yet gotten out of control, we see that this is a major area of concern for global markets. The drivers of this trend are various, from the rising cost of food (which is partially caused by the US ethanol policy), to the rising cost of oil and other commodities. Note: a large part of the run up in prices in commodities is due to China's booming economy, and their need for resources to feed that boom. But, what happens if Chinas growth were to slow? (see our discussion: Changes are happening in China). Another reason for the boom in commodities prices may be due to speculation. Is there a speculative bubble in commodities? What happens to economies in emerging markets if that bubble bursts? See our discussion on speculative asset bubbles (internet, housing, commodities)
What is causing it?: High commodity prices are forcing consumers to divert more of the household budget towards energy goods and services.
High High Oil Prices are leading to inflation by increasing shipping costs. see also: supply chain, logistics , transportation industry
Stagflation fears
definition: "stagflation" is the mixture of stagnation (low economic growth) with inflation (rising prices)
The coincidence of worldwide inflation scare and signs of U.S. recession and global growth slowdown have revived the 1970s stagflation specter. Important differences exist though such as benign wage pressures, the demand-driven nature of the current slow-motion commodities boom, central bank commitment to price stability, and the prospect of further housing deflation. NBER economists are in the midst of re-assessing the Great Inflation. Check out: “Commodity Prices vs Recession: Difference Between Now and 1970s Stagflation” and “Retrospective on the Great Inflation: NBER Pre-Conference Papers”
Importing inflation
The US is importing inflation from China. Plus, the weak dollar is making imports such as oil more expensive. Plus, there are record food prices as a result of US energy policy (substituting corn-for-food, for ethanol production.)
2-15-08
import prices soared last month on higher energy, food and commodity prices, pushing the annual increase to a record high, the Labor Department reported Friday.
In a worrisome trend for Federal Reserve officials as they balance recession worries with stubbornly high inflation, price pressures appeared to spill over into consumer goods, while import prices from China posted their biggest monthly and annual increases on record.
Separately, U.S. industrial production increased during January but only slightly as colder weather elevated utilities output and offset sharp declines in the auto and housing sectors, the Federal Reserve said.
Inflation hurts emerging markets more
What is the main cause of emerging market inflation?
Choices:
1. Unfortunate that food and energy prices are rising?, or
2. Self caused pain due to excess monetary liquidity?
“Those who think inflation is caused by too little pork rather than too much money are wrong.” FT oped on China, Ken Rogoff
Broadly, there are two competing explanations for the rise in emerging market inflation. The first is what I'd call the "bad luck" explanation. Those living in emerging markets have, on average, lower per capita incomes than those who live in the developed world. Proportionately, more of their income is spent on basic items such as fuel and food. The prices of these "basics" tend to move around in volatile fashion in response to bad harvests, occasional wars or the onset of disease. As a result, inflation rates within emerging economies move up and down a lot more than their equivalents in the developed world. High inflation in one year could easily be followed by low inflation the next year.
The second explanation is monetary in nature. Inflation is rising because monetary conditions are simply too loose. And because people in emerging markets spend most of their income on the basics, it's no great surprise that the prices of fuel, food and other essentials go up. This is not a case of bad luck. It is, instead, the outcome (perhaps unintended) of a series of earlier monetary policy decisions. source: Stephen King of HSBS link
Inflation leads to political unrest
rising inflation can easily lead to an unfair redistribution of income. Some will end up a lot better off. Others will be a lot worse off. The social tensions associated with this process can easily lead to political turmoil. Inevitably, politicians try to keep the lid on this pressure cooker by imposing price and wage controls, but then, of course, they're heading straight back to the 1970s. Stephen King of HSBS
Most of the high inflation emerging economies either peg to the dollar or intervene heavily to manage their exchange rate against the dollar. No one forced the Saudis – just to pick an example -- to peg to a depreciating dollar and cut domestic rates even as domestic Saudi inflation rose. The Saudis could have dropped their dollar peg. Bernanke’s mandate is to pursue policies that support price stability and employment in the US – not to balance the monetary policy the US needs with the monetary policy the rest of the dollar zone needs.
Will there be a bubble bust in emerging markets?
The question is whether the great emerging market inflation of 07 and 08 will be followed by a big emerging market bust in 09 or 10, a bust that will have its roots not in a collapse in external capital inflows but rather in the domestic excesses in the boom years?
INFLATION NATIONS
Amid ongoing solid growth in the global economy, hardly any region in the world has not felt the sting of higher prices of everything from cooking oil and gasoline to education and health care.
Inflation is at 16-year highs in Saudi Arabia, a 14-year high in Switzerland, a 25-year high in Singapore. And the list goes on and on.
Australia's central bank on Monday bluntly warned that it would need to raise interest rates further to contain inflation even though it lowered its outlook for economic growth.
"In previous booms, we've had inflation causing central banks to tighten and that brought growth to a halt," said Gabriel Stein, an economist with Lombard Street Research in London. "This time, we have weakness from another source that in some places stops central banks from tightening, so there is a risk of embedding inflation expectations."
Inflation in the US
The Federal Reserve is a case in point. One of its main goals is to keep a lid on inflation expectations, since they can influence how people behave in the marketplace, which in turn has an impact on future inflation.
But to keep the economy from tipping into recession, the Fed has slashed benchmark interest rates by two and a quarter percentage points since mid-September despite signs of elevated inflation.
But risks remain. Stein said he expects non-food, non-energy inflation to remain elevated throughout 2008, and if the Fed fails to address it by year end, investors may start dumping Treasury debt, which of course would be negative for the dollar.
"I won't say the Fed is playing with fire, but whatever it does short term, it had better think very carefully about the longer term," he said.
Inflation in Europe
The ECB's dilemma is different but no less difficult. The economy has shown signs of slowing, and many fear it that will get worse if the U.S. falls into recession.
But with inflation at 14-year highs, its ability to follow the Fed's lead and slash interest rates aggressively is limited. "Once the authorities give in to growth concerns, the euro will probably head even lower, and that will push inflation up even more," said Allegiant's Schultz.
"The biggest loser is going to be the Europeans."
Inflation in China
Inflation is ticking upwards in China and around the world...in large part because Chinese goods are becoming more expensive. see our discussion about Changes are happening in China. In addition to local chinese inflation....as the Chinese currency has appreciated , it has made Chinese exports more expensive on the world market...and therefore China is also exporting inflation to the rest of the world.
As the Chinese economy fights inflation, they have been forced to raise interest rates, which has attracted the desire of foreign investors to invest in China, which would have the effect of pushing the currency even higher, but China is desperately trying to maintain their system of capital controls. Will this delicate balance last? Will China slip into recession? If so, what does this mean for the global economy?
In China, where the currency is managed by the central bank, officials are dealing with a different dilemma: keeping growth solid and inflation contained by slowly allowing the yuan to strengthen. Government data there shows consumer inflation remains near an 11-year high. At a time when global growth is slowing and prices are rising, a strengthening currency can help protect consumers by boosting their buying power.
Beijing's top concern today is inflation, which rose to 6.9% in November. On January 9th the government announced tighter price controls on a range of products. The People's Bank of China (PBOC) increased interest rates six times in 2007, but this is unlikely to squeeze inflation, which has been driven largely by a end of cheap food caused by supply-side shocks. A faster pace of currency appreciation offers a more powerful weapon: it will help to reduce imported inflation, especially of food and raw materials.
Examples of Chinese prices rising
Chinese Toy industry
Costs are rising fast and a series of product recalls. Costs are rising in other areas, too. The high oil prices makes rubber and plastic more expensive. The commodities boom has increased the prices of wood and metals. But by far the greatest worry is China's tightening labour market. Labour costs are up 30-35% since last year, according to Jeffrey Lam, a member of Hong Kong's legislature who runs a toymaking company and is an adviser to the territory's local trade group. Wages are up by 10-15%, he says, and a new labour-protection law that came into effect on January 1st increases costs by the same amount again. The yuan, China's currency, is appreciating. Even with higher pay, factories are short of workers, so costs seem likely to rise further. “Everyone should be aware”, says Mr Lam, “that China has changed.”
Womens Shoes
women's shoes—an industry that, alongside toymaking, has been critical to the economic growth of southern China. When a large American retail chain recently sought to order some shoes for April it was asked to pay 20% more than the quote it received in October for delivery next month. Conditions, the buyer concluded, are “ugly”.
Shifting Supply Chains
there are murmurings that many factories in southern China will have to close this year. Manufacturers are looking for alternative locations. Moving inland is possible, but infrastructure is a concern; Vietnam is another possibility, but land and labour costs are rising there as well.
Falling Shipping Prices - not a good sign!
The only price that is falling, and so far only to a few locations, is for shipping. In part that is because there are more ships, but it may also suggest that demand is softening, which is hardly encouraging.
see more in our discussion about Changes are happening in China
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