Inflation threat rises in South Asia

Just five  months ago, inflation in India seemed to be well under control. On June 11, Bloomberg reported that Indian wholesale prices had increased just 0.13 percent in the last week of May. That was the lowest rate of inflation in 30 years.

What a difference five months makes. Now both inflation and inflationary expectations are rising fast.  As India Knowledge@Wharton noted:

The IMF, which in March 2009 projected inflation of just 2% for the fiscal year ending March 2010, now sees inflation at 8.7% for the calendar year of 2009. In October, its Regional Economic Outlook warned: “In India … industrial production is recovering rapidly, and core inflation and inflation expectations are rising.”

India, of course, is the region’s largest and most geopolitically important country. But according to AFP, it’s not just India that has experienced an abrupt increase in inflation. The entire south Asia region is under siege:

In the third quarter of 2009, inflation in South Asia, which aside from the Maldives comprises India, Pakistan, Nepal, Bangladesh, Afghanistan, Sri Lanka and Bhutan, hit an average 10.9 percent, the World Bank said.

The biggest cause: skyrocketing food prices. In India, for example, the price of sugar has increased 45.7 percent from last year. The price of potatoes is up 96.4 percent. The price of onions: up 37.6 percent.

Another cause: rising electricity prices. In Pakistan, a restaurant owner claims his electricity bill has doubled since General Pervez Musharraf was forced to resign just over a year ago.

Not surprisingly, the middle class has noticed. As AFP notes, higher prices for basic staples like food and energy are increasing dissatisfaction with a Pakistani government that had already been unstable:

In a country with huge disparity in wealth, life has always been a struggle for the third of the population that lives below the poverty line but now lower-middle class and professional families find it increasingly difficult to make ends meet.

The rupee has depreciated by 35 percent in the last year while electricity, gas and petrol prices have doubled in the last two. The country faces a crippling energy crisis, producing only 80 percent of its power needs, causing debilitating blackouts and suffocating industry.

Price hikes and shortages of essential items such as sugar and flour complicate housekeeping and exacerbate the rock-bottom unpopularity of President Asif Ali Zardari, head of the Pakistan People’s Party (PPP).

The experience of India, Pakistan, and other south Asian countries offers two helpful reminders. First, when inflation arrives on the scene, it can spiral out of control  more quickly than just about anyone expects. Second, inflation is not just an economic problem, but also a political one.

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Food packages are shrinking, but prices remain the same

No it’s not your imagination. That roll of toilet paper you just bought really does have fewer sheets than it used to.

WINK News of Southwest Florida reports that consumers good companies are up to their old tricks. Rather than raise prices, they are making their packages smaller and charging buyers the same price. A few products to look out for, according to the WINK News team:

  • canned fruit: 16 ounce cans is now 14 ounces
  • soda: 20 fluid ounce bottle is now 17 fluid ounces
  • Häagen-Dazs ice cream: 16 fluid ounces is now 14 fluid ounces
  • dog food: 20 pound bag is now 18 pounds
  • Consumers are noticing, and–surprise!–they aren’t happy. When Mary Hance wrote about shrinking packaging last month for her local newspaper in Rutherford County, Tenn.,  she got an earful.

    I had one man call and tell me that he thinks eggs have gotten smaller with different grading criteria — meaning that today’s large egg is what used to be called an extra large egg and so on. I read online about shrinking packages for everything from dog food to contact solution, canned ice tea, liquid detergent, yogurt and more.  Jan Tidwell, of Hermitage, wrote: “Ms. Cheap … you are so right about many things being reduced — especially about a can of tuna. I remember when it use to make 3 or 4 sandwiches, now it barely makes 1 1/2.”

    That last reader is correct, by the way: a can of tuna contains less tuna than it used to.

    “Yes, these days just about every business is struggling to contain costs,” Hance concludes, “but companies need to be up front about it and let their customers know what they are doing and why they are doing it — instead of trying to slip one over on us.”


    Medicare supplemental health insurance premiums are rising in Rhode Island

    The Warwick Beacon reports on rising Medicare Supplemental premiums in Rhode Island: “Even though they’ll get no cost of living increase in their Social Security, senior citizens who buy supplemental health insurance for Medicare will be paying, on average, 4 percent more next year for premiums.”


    Swiss Re CEO expects higher premiums in 2010

    Dow Jones Newswires: “Swiss Reinsurance Co. Chief Executive Stefan Lippe said Thursday market fundamentals point toward higher prices and that the company is well positioned for the renewal season when next year’s reinsurance contracts are fixed in January.”

     

     

     


    Timber prices up 9.7 percent from a year ago

    AP reports:

    Prices in the depressed lumber industry have risen recently, as production has fallen to meet demand and dealers have begun restocking inventories…

    The publication reports the recent price of framing lumber was up 9.7 percent from a year ago and the cost of structural panels was 2.6 percent higher.


    Paperboard prices are rising

    Dividend Daily reports that a Goldman Sachs analyst expects containerboard prices to increase during the next several months: “The analyst said it expects containerboard prices to jump by $50 per ton by February or March of 2010, higher that a prior outlook for a $40 per-ton increase by April.”

    In related news, Georgia-Pacific stated it would raise prices on its linerboard by $50 – $70 per ton last week. In addition, Longview Fibre recently announced a $50 per ton increase. Iggesund Paperboard announced a price increase for its folding boax board products in Europe.


    Home prices have already bottomed

    A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or more.

    “Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels – that’s how you know the bottom is in,” says blogger Barry Ritholtz, who believes home prices are “not even close” to the bottom.

    Henry Blodget, who blogs at Business Insider, agrees wholeheartedly: “The recovery’s momentum is slowing … and it seems likely that house prices will now resume their fall and drop another 10%-15%.”

    In the wake of this week’s Case-Shiller report, many headlines were similarly gloomy about the prospects for continued home price appreciation:

    This follows Meredith Whitney’s prediction last month that U.S. home prices will fall another 25 percent. “There is no doubt that home prices will go down dramatically from here, it’s just a question of when,” she told CNBC.

    Granted, the housing market may correct a bit from here, especially in the winter (traditionally a slow period for home sales), but I think the odds of a major retrenchment in prices are very low.

    Why?

    First, the Case-Shiller index is up five months in a row–a sign of substantial strength.

    Second, pending home sales are up eight months in a row–the longest streak since measurement began in 2001.

    Third, the inventory of new homes at the current sales rate was 6.7 months in October, the lowest since December 2006. As Mark Perry observes, that’s “just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.” Perry provides the following chart:

    Fourth, the number of new housing starts is at a 50-year low. (At least. Records don’t go back further than 1959.)

    Fifth, mortgage rates are at a 38-year low. (At least. Records don’t go back further than 1971.)

    Sixth, exuberant demand and limited supply in many post-bubble cities are leading to bidding wars, especially (but not exclusively) for low-end properties. In San Diego, prices are up 14 percent in the past eight months. In Las Vegas, where bidding wars are the norm, buyers are “going crazy.” Some California cities, like Bakersfield, report unsold inventory of just two months. San Diego reportedly has just a 1.5-month supply of low-end homes, despite a steady stream of foreclosures.

    Housing bears response that demand will dry up once federal tax credits expire. Moreover, they argue that supply will surge once the much-discussed “shadow inventory” of foreclosures hits the market.

    But homebuyer tax credits aren’t going to expire until June 30, 2010. That’s seven months from now. And, let’s be honest, if the housing market is showing significant signs of distress, Congress will not allow the tax credit to lapse. Not in the middle of an election year.

    And there is little empirical evidence to support the notion that a tidal wave of foreclosures is about to hit. “From the things I’m seeing, there’s not going to be a wave [of foreclosures] any time soon,” says Sean O’Toole, president of ForeclosureRadar.  At least one major lender has dramatically reduced the number of  foreclosures it is offering for sale. Fannie Mae has launched a program to rent homes back to borrowers rather than foreclose on them.

    Yes, there are a lot of foreclosures in the pipeline — no one disputes that — but these homes will probably hit the market in a steady stream over a period of several years rather than all at once. The process of foreclosure is getting slower, due to clogged courts and borrower-friendly judicial rulings. If demand remains as strong as it has been, expect foreclosures to be promptly snapped up by buyers and prices to continue their upward trajectory.

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